AOL Back in Black, But Online Unit Struggling

Snapping back from one of the largest losses in corporate history, AOL Time Warner posted a first-quarter profit that beat expectations, but its once high-flying online unit continued to drag down overall results.

AOL said it earned US$396 million in the quarter, a far cry from the $54 billion it lost in the same period last year. Revenue was up 6 percent over 2002 levels to an even $10 billion. The company managed to best analyst expectations on a per-share basis, recording a 9-cent-per-share profit versus a forecast of 4 cents per share.

CEO Dick Parsons said the quarter represented “solid progress” on several fronts, especially debt reduction. AOL sold its stake in GM Hughes and on Tuesday announced a deal to sell its 50 percent stake in the Comedy Central channel for $1.2 billion. Parsons added that the long-awaited IPO of the company’s cable unit will be delayed until the second half of the year.

In a morning conference call, he also said AOL’s effort to reduce debt and increase quarterly cash flow will be a “key metric” for the company going forward. “We have a number of options for getting there, and we’re exploring them all,” he noted. “I have every confidence we’ll meet our goals.”

Not All Sunny

But the silver cloud came with its share of dark linings. AOL said revenue fell 4 percent at its America Online unit, major investors have filed a new round of lawsuits, and a fresh batch of published reports indicate ongoing accounting probes may be broadening to include deals with such online partners as Monster.com.

“I have nothing new to report to you at this time,” Parsons said of the investigations. “It remains one of my highest priorities to work cooperatively with regulatory agencies so that we can bring this matter to a resolution as soon as possible.”

Although job cuts helped keep losses under control at the AOL unit, the company cautioned that advertising revenue from its online service may be down as much as 45 percent compared with 2002 levels.

Making History

The profits came a quarter after AOL Time Warner made history by closing the books on 2002 with a loss of nearly $100 billion, much of it tied to ill-fated investments during the dot-com boom.

While analysts say the first quarter helps set AOL back on track, the diverging fortunes of the Time Warner and America Online divisions may increase pressure to spin off the online unit, UBS Warburg analyst Christopher Dixon told the E-Commerce Times.

“People are still waiting to see the proof that this is going to work the way it was supposed to,” Dixon said. “There is only so much patience, though the pace of change and the level of integration has certainly picked up in recent quarters.”

You’ve Got Declines

Subscription revenue at America Online actually rose 11 percent, though much of the gain was ascribed to overseas markets and friendly monetary exchange rates. Advertising revenue plunged 42 percent, while “other revenues” fell 61 percent, a drop AOL attributed to its decision to do away with pop-up ads.

The company said it ended the quarter with 26.2 million U.S. members of its online service, up 141,000 from the same time last year but down 289,000 from the previous quarter.

Forrester analyst Chris Charron said America Online’s customer losses stem from its late arrival to the broadband game. He added that an intense focus on distributing AOL Time Warner content via the online network is not the way to go.

“Exclusive content will help retain users and maybe even attract a few, but it’s not going to help grow revenue,” Charron told the E-Commerce Times. He said there appears to be demand for some programming, such as that from HBO and the company’s music labels, but it will be more than a year before enough broadband users are in place to make those efforts financially viable.

AOL also needs to remember what made it so popular, he added, by updating its user interface to match the broadband age. “AOL’s usability was always it’s best feature. They can’t forget that.”

Take a Look Ahead

For its part, AOL noted that several newly launched services, including those aimed at boosting broadband adoption and leveraging the company’s media and entertainment assets on the Web, such as MusicNet and AOL Voicemail, have yet to substantially alter earnings results.

Going forward, AOL said the combined company probably will see single-digit top-line growth this year and remains on track to match previously stated targets for all of 2003.