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AOL Time Warner Reports Wider Q3 Net Loss; Revenues, Cash Flow Rise

17 Oct, 2001 By: Staff Reporter

AOL Time Warner Inc. on reported a wider net loss for its third quarter Wednesday as the company recorded charges related to its merger and write-downs for investments.

Revenues and cash flow rose as higher results from movies, the AOL division and costs savings outweighed declines in advertising revenues. But investors sent the company's shares lower on concerns that ad growth may slow at the company's AOL division.

The results were in line with guidance the company issued late last month, when it warned that its full-year results would be below previous estimates due largely to the slump in advertising, which was worsened by the Sept. 11 terrorist attacks.

AOL Time Warner had a net loss of $996 million, or 22 cents per share, in the three months ending Sept. 30, compared to a net loss of $905 million, or 21 cents per share, in the same period a year ago. Revenues, however, grew 6% to $9.32 billion from $8.76 billion.

The company recorded two one-time charges in the quarter, $134 million in costs related to the merger between AOL and Time Warner, which was completed at the beginning of the year, and $196 million to write down investments that had lost value. The company did not disclose details on either charge.

Earnings before interest expenses, taxes, depreciation and amortization -- a measure widely used by investors to estimate cash flow -- rose 20% to $2.46 billion from $2.06 billion a year ago.

On that basis, earnings per share rose to 30 cents per share compared to 21 cents per share in the same period a year ago. Analysts surveyed by Thomson Financial/First Call had expected earnings of 26 cents per share.

Despite the higher per-share earnings, concerns about slower growth at the company's key AOL division led investors to send the company's shares down $1.85, or 6%, to $31.65 in morning trading on the New York Stock Exchange.

Speaking on a conference call, AOL executives told investors that the advertising climate had worsened considerably since the Sept. 11 attacks and remained weak so far in the fourth quarter, which began at the beginning of October.

"In this difficult environment the key to our financial performance is the diversity of our revenues," Jerry Levin, c.e.o. of AOL Time Warner, said on the call. Levin also noted that costs had increased at the company's news operations, which include CNN and Time magazine, because of the attacks and the U.S. military response.

Levin, who spent many years leading the company's successful HBO pay-television network, has been seeking to build up the company's revenues from subscriptions from services such as AOL and magazines, which tend to be more steady than advertising.

AOL Time Warner already relies somewhat less than other major media conglomerates on advertising, which makes up 21% of its revenues compared to about half for Viacom Inc., owner of CBS, MTV and numerous radio and television stations.

AOL Time Warner's total revenues from advertising fell 5% in the third quarter compared to the same period a year ago, while revenues from subscriptions -- which include AOL monthly fees, magazine subscriptions and cable TV fees -- rose 13%.

Earnings from the company's publishing division jumped 41% even though revenues grew only 4% as the company realized cost savings from cutbacks and business consolidations following the merger.

AOL has cut costs aggressively since closing its merger at the beginning of the year, affecting nearly every division of the company. Chief financial officer Jim Kelly, also speaking on the conference call with investors, said the company was looking at further cuts.

"In terms of cost reduction, we are not done," Kelly said.

The company's film and TV division posted a 29% jump in pretax earnings on the strong box office performance of Rush Hour 2 and higher DVD sales as well as cost savings from shutting down its network of Warner Bros. stores.

Music remained a sore spot. Earnings in that division tumbled 21%, a decline the company attributed to lower sales across the industry, higher marketing expenses and foreign currency losses.

In late September, the company lowered its targets for full-year results because of the worsening advertising outlook, as did several other media companies.

AOL said then it expected full-year revenues to grow 5% to 7%, down from previous estimates of 12% to 15%. It also lowered its expectations for cash flow growth for the year to about 20% from previous estimates of 30%.

For the first nine months of the year, AOL Time Warner posted a net loss of $3.1 billion compared to a loss of $3.29 billion in the same period a year earlier. Nine-month revenues rose 6% to $27.6 billion from $25.98 billion.

--Georg Szalai

AOL Time Warner Q3 Report on Filmed Entertainment

Filmed Entertainment's revenues rose 5% to $2.1 billion, reflecting a strong slate of new films, a 44% increase in DVD revenues, and higher revenues from television syndication sales. Filmed Entertainment's EBITDA grew 43% to $307 million, benefiting from revenue growth, the closure of the studio stores, and reduced expenses for online development.

Primary contributors to domestic theatrical revenues for the quarter included Rush Hour 2 ($290 million worldwide box office to date), New Line Cinema's highest-ever domestic grossing movie, and Cats & Dogs ($174 million). International revenues benefited from releases of A.I. ($217 million), Cats & Dogs and Swordfish ($123 million).

Warner Home Video increased its DVD sales by 96% over last year's third quarter to approximately 24.6 million units.

(Source: AOL)

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