AOL Time Warner reported pro forma net earnings of 32 cents a share on sales of $9.2 billion. That compares with earnings of 23 cents a share on $8.9 billion in revenue from the year before. The company was expected to report earnings of 28 cents a share on sales of $9.74 billion, according to a First Call estimate.
Earnings before interest, taxes, depreciation and amortization (EBITDA) jumped 20 percent to $2.5 billion from the previous quarter. Free cash flow rose 55 percent to $519 million, excluding merger-related costs.
Jordan Rohan, an equity analyst at Wit SoundView, pointed out that revenue from certain businesses came in below his expectations, causing him to reconsider his future estimates. Of particular concern was the company's America Online unit, whose subscription revenue reported below his estimates. The company's music and networks divisions also came up short.
"The company lost revenue momentum this quarter," said Rohan. "From an investment point of view, there will be some legitimate concerns about future revenue growth."
Shares of the company were down $2.95, nearly 6 percent, to $46.50 in early morning trading.
AOL Time Warner executives have set aggressive price targets for the year as a combined company. Executives said they expect to hit $40 billion in revenue and $11 billion in EBITDA for 2001 as a merged company, and have said the company's mixture of businesses makes it resistant to the effects of an economic slowdown. Though AOL Time Warner has not suffered as greatly as some of its competitors in the media world, the slowdown seems to have taken the wind out of its sails.
During a call with Wall Street analysts, CFO J. Michael Kelly reiterated AOL Time Warner's year-end financial goals. However, Kelly softened the $40 billion goal, claiming it would be "at the top of the range" of the company's revenue performance.
Rohan added that he plans to lower his 2001 revenue estimates below $40 billion, but expects the company to hit its EBITDA projections.
Including charges, AOL Time Warner reported a net loss of $734 million, or 17 cents a share. The company lost $924 million, or 22 cents a share, during the same period a year ago.
A focus on subscriptions
Wednesday's report is the third time AOL Time Warner has reported as a combined company since merging in January. Analysts generally have remained optimistic about the company's ability to hit its earnings targets. Nevertheless, AOL Time Warner has undergone cutbacks through layoffs and integration measures. Last quarter, AOL raised its monthly subscription fee to $23.90 from $21.95, but the price increase did not go into effect until this month.
In light of the weak advertising environment, AOL Time Warner has focused much of its future performance on subscriptions, which generated $2.9 billion in revenue, an increase of 10 percent from a year ago.
The company said total subscriptions over the quarter reached 135 million, an increase of 17.9 million since last year. As of June 30, its AOL service had 30.1 million members; Time Warner Cable digital-cable subscribers reached 2.5 million, and its Road Runner cable Internet service reached 1.4 million.
The AOL and cable divisions remain the company's biggest cash generators. Out of all divisions, AOL led the company in revenue and EBITDA. AOL Time Warner Chief Executive Levin has stated publicly that AOL has become the cash cow for the company.
Nevertheless, the weak economic environment has affected the company's revenue. Content and other revenue declined 4 percent to $2.9 billion. Advertising and commerce revenue grew only 1 percent to $2.3 billion, but AOL's and Time Warner Cable's advertising businesses grew 26 percent and 19 percent, respectively.
Overall, analysts were skeptical about the company's ability to meet its year-end estimates because of sluggish performance in divisions such as music, publishing and networks.
"They've put a lot of pressure on themselves to perform," said John Corcoran, an equity analyst at CIBC World Markets. "If the macroenvironment doesn't cooperate, it will be a challenge for them to make the $40 billion in revenue and $11 billion in EBITDA."
Looking at the numbers
In terms of performance per division, the results were as follows:
America Online: Revenue reached $2.1 billion, with advertising and commerce hitting $706 million, up 26 percent from the same period last year, and subscription revenue hitting $1.3 billion, up 8 percent. EBITDA reached $801 million, up 37 percent, because of higher advertising and commerce revenue, increased operating efficiencies and reduced network costs, according to the company.
Time Warner Cable: Revenue hit $1.7 billion, up 14 percent from last year, with $1.6 billion from subscriptions and $142 million from advertising and commerce. EBITDA for the division climbed 13 percent to $777 million.
Filmed Entertainment: Revenue rose 5 percent to $1.9 billion. EBITDA was up 17 percent to $250 million. The company expects major gains from late-season releases of "The Lord of the Rings" and "Harry Potter and the Sorcerer's Stone."
Networks: The division reported a mere 2 percent increase in revenue, reaching $1.8 billion. EBITDA hit $444 million, up 18 percent. But its advertising revenue declined 8 percent to $679 million, largely because of weaker advertising revenue at its Turner Broadcasting Networks, the company said.
Music: Warner Music Group's revenue decreased 11 percent to $895 million because of lower music sales, the company said. EBITDA also declined 33 percent to $87 million because of revenue decline and increased marketing costs for emerging artists.
Publishing: Revenue declined 1 percent to $1.2 billion because of weakness in the advertising market, the company said. EBITDA rose 21 percent to $271 million.