AOL Time Warner, the world's largest media company, posted net income of $396 million, after a loss of $54.2 billion in the first quarter of 2002. A change in accounting principles skewed the year-ago loss; factoring out the accounting change, net loss would have been $9 million.
Revenues increased 6% to $10 billion, boosted by revenue hikes in filmed entertainment, publishing and networks units. Advertising revenues were affected partly by a drop in intracompany advertising, which fell nearly by half, to $78 million, from $132 million in 2002. AOL Time Warner was at one time its own biggest advertiser through the cross-promotional efforts for its properties.
The publishing and TV networks units
Magazines showed a 10% increase in ad revenue from titles across the board, except for the business and personal finance publications, said Don Logan, chairman of the media and communications group that includes Time Inc., the nation's largest magazine company. Some of the upturn may be due to favorable comparisons to the year-ago period, when magazines were feeling the effects of ad cancellations due to the Sept. 11 attacks, Mr. Logan said.
Magazines see slowdown
He warned that magazines, for which advertising is booked on longer lead times than other media, are seeing a slowdown in the second quarter due to the war and the weak economy, but he said it's too early to make revenue predictions for the quarter.
Cable revenues grew 9%, in spite of a 33% drop in advertising revenues. The drop was due to a decrease in advertising bought by cable systems to promote new channels and a decrease in intracompany advertising. Mr. Logan said that factoring out those categories, third-party cable advertising grew 15%. The company's cable properties include the Turner Broadcasting System and CNN.
The troubled America Online unit continues to be the weak spot for the company, although management maintained the unit beat expectations for the quarter. America Online posted a 3% drop in revenue following a 42% drop in advertising and the service's policy of reducing pop-up ads online. More than half the ad revenue booked in the quarter came from prior-period commitments, Mr. Logan said, but he vowed the service is reducing its backlog of commitments with every quarter. He noted America Online had $400 million in prior-period commitments outstanding at the end of the quarter, compared to $500 million in the same period in 2002.
"This concept of backlog is going to disappear by the end of the year," Mr. Logan said.
Management admitted the turmoil caused by America Online's accounting of its revenue in past years could affect a planned spin-off of AOL Time Warner's cable systems.
The spin-off, expected to take place in the second half, could be held up by federal regulators while the U.S. Securities and Exchange Commission and Department of Justice investigate AOL Time Warner's past accounting practices, Chief Financial Officer Wayne Pace said.
Reducing $26.3 billion debt
Resolving the federal probes is still a priority, along with reducing the company's debt load, Chairman-CEO Richard Parsons said. AOL Time Warner ended the quarter with debt of $26.3 billion, somewhat lower than expected, Mr. Pace said. The company plans to reduce the number through increased cash flow and asset sales, he added. AOL Time Warner said yesterday it is selling its 50% stake in the cable channel Comedy Central to Viacom for $1.2 billion and that it is seeking buyers for its Warner Music unit.
Management reaffirmed its forecasts of 2003 revenue growth in the mid-single-digit percentages, despite a continued forecast of flat revenues and 35% to 45% drop in ad revenue at America Online.