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AOL earnings: Not out of woods yet

Wall Street isn't expecting any surprises when AOL Time Warner reports its earnings on Wednesday: Film and cable businesses will be strong as the AOL unit continues to suffer.

Wall Street isn't expecting any surprises when AOL Time Warner reports its second-quarter earnings on Wednesday: Film and cable businesses will be strong as the America Online division continues to suffer.

The world's largest media company is expected to report pro forma earnings, excluding goodwill charges, of 22 cents a share on revenue of $10.2 billion, according to earnings tracking firm First Call. Although the revenue estimates top the $9.2 billion generated last year, the company's troubled AOL division is expected to continue its precipitous slide from evaporating online advertising dollars.

"We expect AOL Time Warner to report an in-line quarter with yet another disappointing performance by the AOL unit," Youssef Squali, an analyst at First Albany, wrote in an earnings preview note Tuesday morning.

It's been a tumultuous quarter for AOL Time Warner. The company's stock continues to slide in the midst of corporate accounting scandals that have rocked Wall Street, new allegations about the AOL division's own accounting practices, and a management reorganization that has put the old Time Warner guard firmly in charge of the company. In late morning trading Tuesday, AOL Time Warner shares were trading down 49 cents at $11.52 a share.

Last week, AOL Time Warner's embattled chief operating officer, Robert Pittman, once considered the heir to the CEO throne, resigned under pressure. Pittman will remain active in helping to turn around the AOL unit in Dulles, Va., as the company continues its search for a permanent CEO to run AOL.

In Pittman's place in the Rockefeller Center headquarters, AOL Time Warner appointed Don Logan, CEO of the Time magazine publishing unit, and Jeffrey Bewkes, CEO of Home Box Office, to oversee the company's media and entertainment businesses, respectively. The two executives are widely respected in the company for running strong businesses in the AOL Time Warner pantheon.

Bruised AOL
Meanwhile, typical concerns will continue to circulate around AOL, such as subscriber growth and broadband adoption. Subscriber growth appears to be slowing down as Wall Street waits for a major deal to distribute AOL on a rival cable network. As of March, AOL had 34 million dial-up subscribers, having added 800,000 during the quarter. By comparison, between January and April of last year, AOL added 2 million subscribers.

Tuesday's earnings will also occur under a cloud of uncertainty about accounting practices in the AOL division. According to a report in The Washington Post, AOL boosted its online advertising earnings through questionable deals amid mounting indications that the company would suffer a collapse in ad revenue. Some of these deals included accounting disputes over ad revenue, bartering ads for computer equipment, and shifting revenue from other divisions to boost ad revenue, among others.

Indeed, the AOL division's advertising and commerce business continues to erode. Last quarter, the company reported a 31 percent decline in the business to $501 million. Excluding the $171 million that other AOL Time Warner divisions spent, advertising on AOL, pure advertising and commerce revenue decreased dramatically from the previous year.

Analysts expect the company to address the Post report during its conference call, among other issues involving potentially problematic accounting as well.

"I'm looking forward to (management) getting out in a public forum and dismissing concerns," said Michael Gallant, an analyst at CIBC World Markets. "That's going to help. They've been reluctant to do that."