Posted on 26-4-2002

AOHell
By SETH SCHIESEL, NY Times (photo shows Richard D. Parsons who will become
chief executive of AOL Time Warner in May)

AOL Time Warner, the world's biggest media company, said yesterday that it
would not achieve its original financial goals for 2002 because the online
advertising market had deteriorated even further than it had expected.

The announcement came as AOL Time Warner announced first-quarter results
that exceeded Wall Street's expectations, even though the company reported
a $54.2 billion net loss, among the biggest quarterly losses in corporate
history. That loss was a result of an expected noncash charge reflecting a
steep decline in the company's value since America Online, the premier
company in cyberspace, agreed to acquire Time Warner, the No. 1 company in
traditional media, in January 2000.

Yesterday's announcements made it clear that the difficulties facing the
company's flagship America Online unit are more daunting than even some
pessimists had expected. For many investors, those difficulties have
obscured the relatively strong performance of the company's traditional
media divisions. The troubles at America Online have been the prime force
behind the steep drop in the company's shares, which have fallen nearly 40
percent this year. Before the results were announced, AOL stock closed at
$19.30 a share, up 19 cents.

As its subscriber growth has slowed and, more important, as the online
advertising market has collapsed, the America Online division, which was
meant to be the company's growth engine, has stalled. By contrast, many of
the old Time Warner divisions, once dismissed by dot-com acolytes as stodgy
relics, have steadily forged ahead.

Richard D. Parsons, who is to succeed Gerald M. Levin as chief executive
next month, comes from the Time Warner side of the company. He will inherit
a difficult hand.

Moreover, some media investors fear that as a former lawyer and banker, Mr.
Parsons lacks the deep experience in the media business required to parlay
that hand into a winner. He has irked some investors as he has described
Wall Street's focus on quarterly financial results as shortsighted.

Yesterday, however, Mr. Parsons started trying to revamp his image.

"I want to assure you that as C.E.O., I will be focused on producing
results, quarter after quarter, that will put us at the top of our peer
group," he said in a conference call with investors. "AOL Time Warner is a
big, dynamic company, and our online business is only one part of the
whole. My focus is on maximizing the results across the entire company."

According to yesterday's announcements, the company will not do as well in
2002 as it had led investors to expect.

In January, AOL Time Warner said that it expected to report revenue growth
of 5 to 8 percent this year. Perhaps even more important, the company had
told Wall Street to expect 8 to 12 percent growth in earnings before
interest, taxes, depreciation and amortization — the measure called Ebitda,
which is the most widely watched financial measure for media companies.

Yesterday, however, the company said that it planned to record Ebitda
growth of only 5 to 9 percent this year. The revenue estimate was
unchanged. The company attributed the Ebitda shortfall entirely to weakness
in the online advertising market.

For the quarter, the America Online unit reported revenue of $2.3 billion,
unchanged from the period a year earlier. The unit's Ebitda measure fell by
14.6 percent, to $433 million from $507 million.

The company's star division was its filmed entertainment unit. Propelled by
the continued success of "Harry Potter and the Sorcerer's Stone" and "The
Lord of the Rings: The Fellowship of the Ring," which were each released
late last year, the unit reported a 60.2 percent jump in Ebitda, to $181
million from $113 million, even as the division's revenue fell 3.4 percent.

The company's music business, which has struggled recently, bounced back a
bit, with a 2 percent Ebitda increase and 5 percent revenue growth.

Not including one-time items, the company's free cash flow — another widely
watched measure — increased to $1.3 billion from $472 million in the period
a year earlier.

"Obviously, bringing down guidance was disappointing," said Richard
Greenfield, a media analyst for Goldman, Sachs, "but the strength of the
Time Warner businesses, as well as the significant free cash flow
generation, drives our continued belief that the valuation is compelling."

What the company calls its cash earnings measure, an unofficial financial
yardstick, was reported at 18 cents a share. By that measure, analysts
surveyed by Thomson Financial/First Call had expected only 14 cents a
share, sending the company's shares higher after hours. They traded as high
as $19.95.

Including special charges, the company formally reported a loss of $54.2
billion, or $12.25 a share. In the period a year earlier, the company lost
$1.4 billion, or 31 cents a share. Revenue increased 7.1 percent, to $9.8
billion from $9.1 billion.