When AOL Time Warner reports fourth-quarter results Wednesday, Wall Street will be listening for signs of a turnaround at the troubled online unit and for indications of the company’s financial strength beyond its robust film division.
THERE SHOULD BE no surprises and little excitement when AOL Time Warner reports its fourth quarter and full-year 2002 results Wednesday, just after market close.
AOL is expected to report cash earnings of 27 cents per share in the fourth quarter, according to 20 analysts surveyed by First Call, a 4 percent rise over cash earnings of 26 cents per share in the same period last year.
In a research note issued Tuesday, Merrill Lynch analyst Jessica Reif Cohen projected 6 percent revenue growth to $11.2 billion in the fourth quarter.
“While we are not expecting any significant surprises in the quarter, we believe that much of the focus will be on [2003] guidance,” Cohen wrote.
Investors are already braced for a writedown of as much as $15 billion for the fourth quarter, reflecting the decline in AOL’s value. (The media conglomerate already wrote off $54 billion last April for the same reason.)
And AOL’s executives have also already cautioned that online ad revenue could fall as much as 50 percent in 2003, after a 21 percent slide to an EBITDA (earnings before the deduction of interest expenses, taxes, depreciation, and amortization) estimate of $1.4 billion in 2002, according to management guidance.
Beyond that, there are significant challenges facing AOL in 2003, such as how does chief executive and newly appointed chairman Richard Parsons plan to improve the media company’s balance sheet and pay off its $26 billion in debt.
Investors are hoping Parsons will offer a progress report on the initial public offering of its cable division. The company has said it plans to spin-off an estimated 25 percent to 30 percent stake of the cable group, which could bring in $6 billion.
Parsons may also address plans to sell its 50 percent stake in the cable network Comedy Central, which is co-owned with Viacom. That deal could bring in an additional $1 billion, analysts estimate.
AOL executives need to give indications that units other than the film and cable divisions are growing on a sustained basis, analysts say.
“Movie units fluctuate sporadically and unpredictably,” said Phil Leigh, an analyst who follows AOL for Raymond James & Associates. “Here’s the opportunity to say the advertising market is picking up, that cable and HBO are doing better.”
The film unit, including Warner Bros. and New Line Cinema, has been flying high on the strength of blockbuster theatrical franchises such as “The Lord of the Rings” and “Harry Potter,” pumping AOL’s EBITDA 26 percent in 2002, according to Merrill estimates.
NOT A WASTING ASSET?
Although Parsons is expected to focus on growth at Time Warner’s film, cable, TV and publishing divisions, the main issue for the coming year is the troubled AOL unit.
“People want assurance that AOL doesn’t become a source of losses,” said Leigh. “It’s one thing that it’s no longer a growth engine, but now there are concerns that it is a wasting asset that will offset gains.”
It’s too early to see significant results from the turnaround plan that was unveiled in early December, but Wall Street is anxious for guidance on how many of AOL’s 27 million dial-up members in the U.S. are switching to broadband Internet subscriptions.
“Any outperformance will be favorably looked upon,” said David Joyce, analyst with Guzman & Co. in Miami.
AOL’s salvation is supposed to come from boosting high-speed Internet subscribers, selling premium content, developing new advertising formats and growing e-commerce services.
An estimated 18 percent of U.S. households had high-speed connections to the Internet by the end of 2002, based on Forrester Research’s mid-year projections. As many as 10 million more households are expected to sign up for broadband this year.
“Increasingly it’s more mainstream households who are getting broadband, those who are AOL’s key dial-up subscribers,” said Jed Kolko, principal analyst with Forrester. “This year is a huge opportunity for AOL.”
In her note, Merrill’s Cohen expressed concern about revenue growth from syndicated TV. Beyond movies, a key part of AOL’s revenues in recent years have come from syndicated TV revenues from shows such as “Friends,” “Will & Grace” and “Seinfeld.”
With the exception of “The West Wing” (sold to NBC’s Bravo cable channel for an estimated $1.25 million an episode), the syndicated TV unit isn’t expected to be a big revenue generator in 2003, according to Merrill estimates.
That could put additional pressure on the broadcast and cable networks, which have been enjoying a rebound in TV advertising revenues. The profitable WB, whose viewers are primarily female and between the ages of 12 and 34, reportedly posted ad revenue of $700 million last year.
What likely won’t be discussed is talk of an ouster of former chairman Steve Case from the AOL board of directors. Earlier this month Case, founder of the online service and the executive blamed for the the ill-fated merger with Time Warner, stepped down as chairman, although he remains on the company’s board.
But his resignation may not be enough for some of AOL’s powerful shareholders who blame him for the company’s declining fortune, according to published reports. It’s rumored that these influential investors hope to oust Case from the board at its annual meeting in May.
The ongoing anger at Case may indicate that insiders don’t believe a rebound in the online unit’s business is coming anytime soon.
“Most people on the board will consider that Case has already walked the plank,” said Raymond James’ Leigh. “They’re not going to yield to pressure.”