Numbers Offer Little Clarity at AOL

At

AOL Time Warner

(AOL)

, it may take as long to cure the patient as it took to diagnose it.

With the ailing media and entertainment colossus set to report earnings Wednesday, Wall Street is finally adjusting to the fact that the January 2001 grafting of America Online and Time Warner didn't create a heroic superpower, but a plain old conglomerate susceptible to the same ills faced by all the other companies out there.

As analysts cut their ratings on AOL Time Warner and lower their estimates, it becomes clear that any turnaround in AOL Time Warner's stock price, now bouncing around 52-week lows, will need more solid footing than an upbeat conference call after Wednesday's market close.

To regain investor confidence, the America Online service -- the focus of most of Wall Street's concern -- will have to show improved performance in several areas, none of which appear to be quickly fixable: growth of dial-up subscribers, penetration of the high-speed (or broadband) Internet access market and recovery in online ad sales. Online advertising, in turn, likely relies upon a turnaround in the larger advertising market -- a piece of good news both beyond AOL Time Warner's control and in no apparent danger of arriving anytime soon.

So, on Wednesday, don't expect much more from the company than praise for CEO Jerry Levin, the merger co-architect readying for an imminent departure, and plenty of talk about how the company is better equipped than ever to execute on the cross-media synergies promised by the AOL Time Warner merger -- which, of course, is exactly what the company said all last year that it was doing.

On Monday, AOL Time Warner's shares fell $1.06 to $19.87, not far from the 52-week low of $19 that it touched last week.

By the Numbers

As for the numbers, Wall Street is expecting revenue of $9.46 billion for the first quarter ended March 31, according to Thomson Financial/First Call, up from the $9.33 billion pro forma figure for the first quarter of 2001. Earnings before interest, taxes, depreciation and amortization -- a common media industry financial yardstick -- is expected to come in around $1.9 billion or $2 billion, compared with the 2001 pro forma figure of $1.9 billion.

Likely to cause particular confusion Wednesday afternoon will be the company's highlighted earnings per share numbers. AOL Time Warner favors something called diluted cash earnings per share, which it defines as pretax income excluding noncash amortization expenses but including cash paid for taxes. Even the first-quarter 2001's figure is under dispute, with some analysts referring to AOL Time Warner's actual cash EPS figure of 23 cents and others using the pro forma figure of 16 cents.

First Call has published a range of 7 to 19 cents, with the mean at 14. But that span doesn't include the estimate from at least one brokerage house that follows the company, Morgan Stanley, which has a 5-cent estimate for the quarter.

Meanwhile, in the days and weeks leading up to the earnings call, AOL Time Warner has been subject to multiple stories hammering in on a few surefire themes. The narrowband, dial-up market

has been losing steam, for one. The broadband market is growing more slowly than expected; any growth at all seems to pose an opportunity for AOL to lose its share of the fees companies collect to connect consumers to the Internet.

The online advertising market

continues to suffer. Things are so troubled at America Online that co-Chief Operating Officer Bob Pittman

will have to take on old responsibilities to whip the division into shape. Finally, the company still hasn't been able to create the cross-media marketing machine it once promised would protect it from an economic downturn.

Of course, none of these Romes can be built in a day.

In the absence of any signs of AOL Time Warner's speedy recovery, investors -- abhorrers of patience as well as of a vacuum -- have amused themselves in recent days with calculations of the value that could be added to AOL Time Warner by spinning off America Online, which the market, by some calculations, appears to be valuing at zero.

Such a scenario, which illustrates Wall Street's occasionally phenomenal talent for wishful thinking, seems about as likely to succeed as a surgical deconjoining of the famed two-headed snake recently discovered in Spain.

"That's not going to happen for a thousand different reasons," says one buy-sider who was recently short AOL but has no current position in the stock. "They're not going to admit defeat," says the buy-sider, speaking on condition of anonymity.