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AOL earnings: Business as usual

Analysts do not expect surprises when the company reports earnings Wednesday, but they will be looking for signs that the weakening economy could drag down its performance.

Wall Street analysts do not expect big surprises Wednesday when AOL Time Warner reports first-quarter earnings, but they will be looking for signs that the weakening economy could drag down its performance in the coming months.

AOL Time Warner executives have outlined an aggressive earnings target for the year. Despite a significant drop in advertising spending that has hurt both online and offline rivals, Wall Street expects them to reiterate their projections.

Shares of AOL Time Warner on Tuesday rose 59 cents, or 1 percent, to $43.90 by the 1 p.m. PDT close of regular trading.

On Wednesday, in its second financial report as a combined company, Wall Street expects AOL Time Warner to earn a profit of 20 cents a share excluding one-time charges and gains, according to First Call's consensus estimates. The Internet and media giant said it would generate $40 billion in revenues and $11 billion in earnings before interest, taxes, depreciation and amortization for 2001.

Most analysts expect the company to meet expectations because of the many businesses under its umbrella. But advertising has come under pressure in both online and offline businesses. And as the overall health of the economy faces continued skepticism, the effect of the slowdown could begin to manifest itself in the company's profits in future earnings quarters.

"We continue to believe these numbers are achievable, although if the economy continues to deteriorate at the same rate it did in the first quarter, we may have to revisit them in a couple of months," Henry Blodget, an equity analyst at Merrill Lynch, wrote in an investor's note Monday.

Indications of the economy's effects will be difficult to pinpoint, analysts say, since AOL Time Warner has many ways of hiding a slowdown through its extensive network of businesses, which include cable subscriptions and programming, Internet services, magazine revenues and subscriptions.

More significantly, the company's numerous assets allow considerable opportunities for cross promotion, cushioning it for the fall in advertising dollars that has bruised rivals in both online and offline markets.

"They're not impervious to the macroeconomic environment," said John Corcoran, an equity analyst at CIBC World Markets. "Because they're so large and can manage so many businesses, they can mask weakness longer than their competitors can."

Subscription hike?
AOL Time Warner executives have discussed the possibility of raising subscription fees for its America Online service, although no rate hike is expected this week or even this quarter.

Analysts anticipate that if the company raises rates, it will do so in the summer, adding $1 or $2 on top of its $21.95 monthly fee. AOL executives have said that a rate hike will happen, but not as a short-term solution to reach financial forecasts.

"If you're at a time at the softer time of the economic cycle, it may not be the best time to raise the rate," said James Goss, an equity analyst at Barrington Research. "You don't want to raise the rate and have churn result." Churn is an industry term referring to subscriptions cancellations.

The AOL online service, along with Time Warner Cable, remains one of the most powerful growth assets for the company. On Monday, AOL announced it had reached 29 million members on its service, a figure that includes people trying out the service for free.

Advertising woes
Despite these jewels in AOL Time Warner's crown, the health of advertising in both traditional and new media continues to suffer. Traditional advertising-driven publishers including Dow Jones and The New York Times Co. have cited downturns in ad revenue.

TV networks have also lamented weakening advertising for putting pressure on their businesses, causing many to scale back on their Internet ambitions.

It goes without saying that Internet companies have painfully taken the blows of a weakening ad market. Internet media companies such as Yahoo, Excite@Home, Walt Disney's Go.com and General Electric's NBC Internet have all drastically cut their revenue projections or shut down because of the drying market for ad dollars.

Jordan Rohan, an equity analyst at Wit SoundView, said he plans to pay close attention to the AOL and cable units to determine whether advertising has hit bottom.

"We've heard from sources in the industry that March has stabilized after a very weak February," he said. "That may indicate that the second quarter may show some signs of life."