AOL Time Warner Inc. showed new signs yesterday that the benefits of merging media and online companies might not be enough to offset an anemic advertising market, as its reported second-quarter revenue rose only 3 percent because of weakness in key media divisions. The news pushed down the company’s stock nearly 10 percent, to $44.65 a share, as investors fretted that AOL might miss its oft-stated financial goals for the year, including a revenue increase of 12 percent to 15 percent increase to more than $40 billion.
Company officials said they remain confident of reaching those targets, although they indicated that $40 billion would be at the top end of the range. Until now company executives have boasted that AOL’s diversified revenue streams, including cable, Internet, movies and music, protected the newly merged company against the effects of a slowing economy. But a widespread falloff in advertising has forced cutbacks throughout the media world—and AOL has not been immune.
“The operating environment is very challenging, and that was reflected in the results of the company,” analyst John Corcoran of CIBC World Markets said.
Whether AOL can achieve $40 billion in annual revenue is going to “be a real challenge,” he said. “Instead of the bar over which they can jump, now it’s the high end of the range. They have left themselves a lot of ground to make up in the next two quarters.”
Much of AOL‘s hope now rests on the success of such second-half projects as the movies “Harry Potter and the Sorcerer’s Stone,” which opens Nov. 16, and the December release of “The Lord of the Rings.” Chief Financial Officer J. Michael Kelly said the company will be “ruthless” in cost-cutting during the second half of the year, although he did not specify where those cuts would come from. Analysts don’t expect massive layoffs, but they reckon the company will target virtually all divisions for selective trimming in such areas as sales and marketing.
In an interview yesterday, chief executive Gerald M. Levin said that despite modest growth in revenue so far this year, “this has been a powerful quarter.”
He cited the advertising revenue strength of America Online and the cable division and pointed to various metrics from the quarter, including the company’s announcement that it is raising its growth estimate for cash earnings per share. That estimate, which subtracts certain one-time items, jumps from a range of 25 percent to 30 percent to 35 percent to 40 percent.
“It’s proof positive that the merger is working. We can move very nimbly to respond to market conditions in . . . Internet time,” Levin said.
The New York media giant reported a loss for the quarter ended June 30 of $734 million (17 cents a share), compared with a loss of $927 million (22 cents) in the year-ago period on a pro forma basis, assuming AOL and Time Warner had merged on Jan. 1, 2000. The $112 billion merger, the largest in U.S. history, was ratified on Jan. 11, 2001. The losses during the latest quarter included goodwill amortization costs mostly related to the merger.
Excluding one-time items, the media company reported a profit of 32 cents a share, up from 23 cents a share a year earlier. The per-share results were 4 cents above analysts’ expectations, according to a survey by investment research firm First Call/Thomson Financial.
AOL generated $9.2 billion in revenue during the quarter, up from $8.9 billion a year ago. Analysts had expected $9.7 billion in revenue, or a 9 percent increase. But advertising and commerce revenue grew only 1 percent to $2.3 billion, and the modest gain was due to two key drivers—America Online, which reported a 26 percent increase in advertising and commerce revenue, and Time Warner Cable, which posted a 19 percent rise.
AOL’s subscription base grew to more than 135 million, an increase of 17.9 million over the past year. The flagship AOL online service added 1.3 million subscribers, giving it a total of 30.1 million members on June 30.
But the online unit’s overall revenue increase of 13 percent was several percentage points lower than some analysts had expected. In addition, the gains at AOL were offset by losses in other units, including its Warner Music Group, where revenue fell 11 percent due in part to poor music sales. And its publishing unit reported a 1 percent drop in revenue, reflecting advertising weakness.
To cope with shaky markets, AOL is using many of its media outlets to promote its products and services. The company said it became the nation’s second largest advertiser during the quarter; usually it’s lower in the top 10.
The company also promoted its cross-marketing efforts. For example, the company said AOL promotions have contributed to a 54 percent increase in traffic to the former Time Warner Web sites.
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