AOL Time Warner Meets Earnings Estimates but Misses on Revenue

George Mannes

07/18/01 - 08:20 AM EDT

AOL Time Warner (AOL Quote - Cramer on AOL - Stock Picks) reported second-quarter results lower than analysts' expectations. Cash earnings met analysts' expectations, but revenue and other crucial earnings measures fell short.

The numbers, released before the market's open on Wednesday, keep the pressure on the media colossus to achieve a second-half rebound if it wants to hit its full-year financial targets.

As in the first quarter, the biggest contributors to AOL Time Warner's bottom line were its America Online and cable system operations.

On Tuesday, AOL Time Warner shares rose 9 cents to close at $49.45. In preopen trading on Island Wednesday morning, the price dropped to $48.05.

For the quarter ended June 30, AOL Time Warner reported revenue of $9.2 billion. That's up from $8.9 billion on a pro forma basis a year ago, assuming the merger of AOL and Time Warner had already taken place. But it's below a consensus of $9.9 billion for the second quarter expected by analysts surveyed by Thomson Financial/First Call

EBITDA, or earnings before interest, taxes, depreciation and amortization, appeared to fall short of analysts' expectations, too. AOL Time Warner reported second-quarter EBITDA of $2.5 billion, up from last year's pro forma figure of $2.1 billion. But the number was shy of several forecasts, such as the $2.6 billion expected by analysts at Morgan Stanley and Robertson Stephens.

Cash earnings, which take into account tax payments, but not amortization expense, were ahead of expectations. The company reported 32 cents in cash earnings for the second quarter, beating the consensus of 28 cents and up from the pro forma figure of 25 cents in the second quarter of 2000.

Free cash flow -- cash flow from operations minus capital spending, development costs and other items -- climbed 55% from pro forma figures last year to $519 million, excluding merger-related costs.

But when the results for AOL Time Warner's first and second quarter are added up, it's clear how much the company has riding on its second-half performance -- boosted, it hopes, by the release of the blockbuster-apparent Harry Potter movie due Nov. 16.

First-half revenue amounted to $18.3 billion, leaving AOL Time Warner to hit sales of $21.7 billion in the second half to reach its revenue goal of $40 billion for the year.

Of greater importance to analysts is the company's EBITDA goal of $11 billion for the year. That means the company will have to go from reported EBITDA of $4.7 billion for the first half to $6.3 billion in the second. That's a lot of flying broomsticks.

In a statement, CEO Jerry Levin says, "We couldn't be more proud of what we accomplished this quarter. ... Our record results are further proof that we are delivering on the promise of the AOL Time Warner merger."

Levin and other executives are banking on continued cost savings and revenue opportunities from tighter integration of the former America Online and Time Warner -- as well as a bang-up second half. "Our subscription businesses are continuing to show robust growth and, as planned, we are looking forward to a strong second half for Film and Music," Levin says. Warner Music Group was particularly weak in the second quarter: Revenue fell 11% from the second quarter of 2000, and EBITDA fell 33% to $87 million. The company blames lower industrywide music sales, unfavorable currency exchange rates and increased costs of investing in emerging artists.