AOL DISCLOSES SEC INQUIRY

CEO Defends Advertising Accounting Methods

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NEW YORK (AdAge.com) -- News that the Securities and Exchange Commission is looking into AOL Time Warner accounting practices overshadowed all
Photo: AP
CEO Richard Parsons defended AOL's advertising accounting in today's conference call with analysts.
else in its quarterly earnings conference call with analysts today.

"The SEC informed us they are conducting an inquiry," CEO Richard Parsons said. "We reiterated that we will cooperate fully."

Mr. Parsons made his comments on the matter shortly after referring to two articles that ran in The Washington Post last week that questioned the accounting methods used in some advertising transactions within its troubled AOL unit.

Defends ad transactions
Mr. Parsons said the company's accounting firm, Ernst & Young, reviewed "all but one" of the transactions referred to in the article at the time they took place and later "each and every one," and found the methods used in those ad deals was "appropriate" and within generally accepted accounting principles.

Still, Mr. Parsons said "merely complying" with such principles "may not be enough," and that the company would continue "simplifying" its structure.

The company reported net income of $394 million or 9 cents a share in the second quarter, vs. a net loss of $734 million or 17 cents a share a year ago. Last year's second quarter income was depressed by amortization of goodwill.

In the second quarter, AOL Time Warner posted an EBITDA increase of 2%, to $2.5 billion, on revenues of $10.6 billion, which were up 10%. The company's overall EBITDA margin declined from

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last year, though, to 23% from 25%, and earnings per share were flat at 24 cents.

AOL unit a focus
The once high-flying AOL unit, which Mr. Parsons described as "my top near-term priority," took up a substantial chunk of executives' comments during the call.

EBITDA at the unit fell 27% to $906 million, and revenues were off 3% to $4.6 billion. Ad and commerce revenues were of 42%, although subscription revenues rose 20%.

The company added 492,000 new subscribers in the quarter -- but analysts had been expecting as many as 1 million.

Responding to concerns over the makeup of AOL's subscription base, Chief Financial Officer Wayne Pace said only 12% of its subscribers were on the service from its ubiquitous free-trial offers, and that 79% paid the full-price rate of $23.90 per month.

'On the lower end'
Mr. Parsons affirmed some full-year guidance for AOL's ad and commerce revenues, which the company had pegged to end up between $1.8 billion and $2.2 billion, but now said the results looked like they would be "on the lower end" of that range. But this would not affect previous guidance for overall revenue growth at the company, he added.

AOL's performance by far was the worst at the company. Overall, ad and commerce revenues for AOL Time Warner were down 11% for the quarter, Mr. Pace said -- but excluding AOL, the company's ad and commerce revenues were up 2%. At the Time Inc. magazine unit, the company posted two consecutive months of ad revenue increases in the low single digits in May and June.

Mr. Parsons also sought, obliquely, to quell concerns that have risen regarding the ongoing role of Chairman Steve Case, characterizing his relationship with Mr. Case as a "terrific partnership."

'So-called instant analysis'
At the beginning of the call, though, Mr. Parsons, said he wanted to address the situation surrounding Bob Pittman, who stepped down as company chief operating officer and AOL's interim chief executive last week.

"A good deal of the so-called instant analysis does not take into account all he accomplished at AOL," Mr. Parsons said. "I think that's unfortunate."

AOL Time Warner's stock closed today at $11.40, down 15 cents, despite a day in which the Dow rallied nearly 500 points. The conference call was held after the trading day was over, and company stock slipped further in after-hours trading.

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