AOL Slashes Cash-Flow Target

Updated from 5:10 p.m. EDT

AOL Time Warner

(AOL)

cut its 2002 cash-flow target, saying that the Internet advertising market has markedly worsened since January.

Releasing first-quarter earnings after the bell Wednesday, the media conglomerate said that earnings before interest, taxes, depreciation and amortization -- a common bottom-line yardstick in the media industry -- would rise only 5% to 9% in 2002. Three months ago, the company had forecast EBITDA growth of 8% to 12% for the year.

The new numbers are a far cry from management's original forecast for AOL Time Warner's growth. At the beginning of 2001, when AOL was loudly and repeatedly insisting it would meet its ambitious financial goals even as the rest of the market went into free fall, the company was predicting 25% EBITDA growth in 2002 and 2003. After the company scaled back estimates last September, it was still promising "double-digit" EBITDA growth for 2002 -- a hurdle the company has now officially backed off of.

In regular trading Wednesday, AOL Time Warner rose 19 cents to close at $19.30, after establishing a new 52-week low of $18.82; after hours, the stock added 70 cents to $20. AOL shares have been trading near their postmerger lows this month as investors increasingly question whether the synergies promised in the huge deal will actually come to pass.

News of the reduced cash-flow growth target came Wednesday as the company posted a staggering $54.2 billion first-quarter loss. The loss was expected, as AOL had warned earlier this year that it would take a massive charge to write down the value of acquisitions including the merger of Time Warner and America Online that created the New York media juggernaut.

On a conference call with analysts following the financial release, CEO-elect Dick Parsons said the company was forecasting advertising and commerce revenue for the online operation to come in between $1.8 billion and $2.2 billion for the year, down from $2.7 billion in 2001. EBITDA for the AOL division, he said, also would come in between $1.8 billion and $2.2 billion, compared with $2.3 billion last year.

To address the problems at the company's America Online division, AOL Time Warner recently announced that Bob Pittman, now co-chief operating officer with Parsons and slated to become sole COO, is taking on the additional duty of running the AOL division.

On the bright side of the advertising business, Parsons said on the call that though it was premature to call a turn, the ad market "feels better," particularly in television. Pittman added that pricing had improved from last year's upfront market levels, but said any recovery would be slow, not sharp.

For the first quarter ended March 31, AOL Time Warner lost $1 million, or less than a penny a share, on an operating basis, excluding various charges. Revenue rose 4% from a year ago to $9.8 billion, beating the $9.4 billion mean estimate of analysts surveyed by Thomson Financial/First Call. EBITDA rose 3% to $2.05 billion, around analysts' expectations. Subscription revenue rose 14%, while advertising and commerce revenue fell 13% from a year earlier, "reflecting weakness in the overall advertising market and difficult comparisons against last year," the company said.

AOL said cash earnings per share rose to 18 cents from 16 cents a year earlier; analysts had forecast 14 cents of cash EPS. The EBITDA margin was flat at 21%.

In comments of interest to investors in pay-per-click search engine operator

Overture Services

(OVER)

, Pittman declined on the call to say whether AOL would be renewing its contract with Overture, a contract slated to expire on Wednesday.

But after that evasion, Pittman added, "The success AOL has had in the past is partnering well," and not trying to do everything itself. Though vague, those words could be taken as a hint that AOL won't develop a pay-per-click advertising system for itself, though it doesn't necessarily mean that Overture will continue to be AOL's designated partner in this business.