Cable-TV and Web Headaches Tarnish AOL Profits Surge

25 July 2003

In some rare good news for AOL Time Warner, second-quarter results show a huge leap in profits. Even this, however, was overshadowed by problems at its internet unit and the ongoing ramifications of an accounts probe.

The ailing media mammoth reported net income of $1.06 billion (€0.92bn; £0.66bn), up from $396 million a year ago, on a 6% revenue rise to $10.8bn. It benefited from a gain of nearly $600m on the disposal of businesses and a $760m legal settlement from Microsoft [WAMN: 02-Jun-03].

Nevertheless, share prices slid 6.8% to $15.71 as investors focused on the shelving of a long-awaited cable-TV flotation and the heavy loss of subscribers at America Online.

Earlier this month, AOL TW signalled that it might abandon plans for an IPO of its Time Warner Cable unit at the end of 2003 [WAMN: 15-Jul-03]. It had already postponed the flotation from its initial target date in April after federal investigators began probing the group’s accounts.

With those inquiries ongoing, AOL TW has decided to shelve the IPO. America’s Securities & Exchange Commission, the media firm revealed, has concluded that the accounting of a $400m ad deal with Bertelsmann was “incorrect”, meaning a restatement of previous results “may be necessary” . It is unlikely the SEC would allow an IPO until the issue is settled.

AOL TW insists it will hit debt targets even without the flotation. However, the new delay does hit the company’s plan to set up a separate stock with which to make cable-TV purchases. An alternative way to achieve this would be to merge TWC with a company already listed on the stock exchange.

Another problem is that cable giant Comcast holds 21% of TWC and was planning to sell it under the IPO. AOL TW must now negotiate with Comcast about ways to buy out this holding.

The media giant’s other major headache is the ongoing downturn at America Online. At the second quarter, the online titan had 25.3m subscribers, down 846,000 from March (though it insists half this decline reflects the removal of non-paying customers). Advertising at the unit slumped 48% year-on-year, pushing EBITDA (earnings before interest, tax, depreciation and amortization) down 9% to $431m.

Despite such problems, AOL TW was sufficiently heartened by the Q2 figures to raise its full-year group EBITDA forecast marginally to “mid-single digits” – though, as chief financial officer Wayne Pace admitted, this means growth is expected “to slow somewhat in the second half of the year.”

Data sourced from: The Wall Street Journal Online; additional content by WARC staff