Earnings: AOL Time Warner contains bad news to America Online

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AOL Time Warner reported more bad news at America Online last week-but investors liked what they heard and the company's stock jumped more than 8%.

Outside America Online, the company met expectations in the third quarter. Even with a big accounting restatement and troubles at AOL, the bad news was at least contained. "AOL Time Warner's results could best be described as a sigh of relief as there were no material negative surprises," said Merrill Lynch analyst Jessica Reif Cohen. The stock jumped $1.17 to $14.70 in the two days after the announcement, though it's down 54% year to date.

For the third quarter, the company posted net income of $57 million or 1 cent a share compared to a loss of $997 million or 22 cents a share in the year-ago period. Earnings before interest, taxes, depreciation and amortization-EBITDA, a measure of operating results before deducting those expenses-declined 4.1% to $2.1 billion. Revenue rose 10% to $9.98 billion, with increases at every division.

AOL Time Warner restated results for the eight quarters ended June 2002, reducing revenue by $190 million and net income by $46 million. The restatement was part of an internal review after the U.S. Department of Justice and Securities and Exchange Commission began investigations of the company's accounting practices.


The restatement lowered AOL's advertising and commerce revenue for the two years ended June 30 by $168 million, or 1% of AOL revenue and 3.4% of ad/commerce revenue. The remaining $22 million in revenue involved AOL transactions where ads were delivered by other divisions. Slightly more than half of the revenue overstatement occurred since January 2001, when AOL bought Time Warner. CEO Richard Parsons said he doesn't expect further restatements as a result of the internal review; investors still are watching the federal government probes.

For the third quarter, AOL Time Warner saw ad/commerce revenue fall 9.7% to $1.7 billion. AOL's ad/commerce revenue dropped 48% in the quarter. AOL is struggling to decrease dependence on ad revenue; AOL Chairman-CEO Jonathan Miller in early December will lay out a new business plan.

The company's TV networks increased quarterly ad/commerce revenue 7%. The publishing unit grew ad/commerce sales 13%, largely due to inclusion of Synapse, a subscription marketing company acquired in December.

One growing category: house ads. Divisions tallied $138 million in ad/commerce revenue from siblings, up 42% from $97 million in the same quarter last year. Divisions report that revenue; the parent subtracts it from the company total.

For 2002, management reaffirmed 5% to 8% revenue growth and EBITDA in the low end of its previous 5% to 9% forecast. But the company set the stage for a "substantial" writedown of goodwill this quarter, reflecting a decline in the value of assets carried on its books-on top of an unprecedented $54 billion first-quarter goodwill writedown.

contributing: mercedes m. cardona, tobi elkin

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