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AOL seen cutting guidance
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January 4, 2002: 5:58 p.m. ET
Weak economy, slowing subscription rate lead to scaled-back forecasts.
By Staff Writer Luisa Beltran
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NEW YORK (CNN/Money) - Media conglomerate AOL Time Warner is expected to cut its earnings estimates for 2002 next week, showing the continued effects of the economic recession.
AOL's current CEO Jerry Levin will join Richard Parsons, the company's CEO-designate, on Monday to discuss plans and outlook for the year. AOL is expected to report fourth-quarter 2001 results later this month and may provide some insight Monday, but is not expected to preannounce a disappointing quarter, analysts said.
Instead, the call will focus on its first year as a combined company and its strategy for 2002. The world's largest media company is expected to elaborate on its earnings guidance for the year, its pending purchase of a 49.5 percent stake in AOL Europe from Bertelsmann AG for up to $8.25 billion, and the slowing growth in U.S. subscriptions at America Online.
"We are hopeful that the company will lay out more conservative guidance for 2002 as a means to rebuild credibility with investors," wrote analyst Holly Becker, of Lehman Brothers, in a research note.
Monday's call will be the first opportunity for Parsons to make his strategy known. He is scheduled to take the helm of the company in May, succeeding Levin, who announced plans to retire last December.
"For 2002, they may indeed come in and assume more conservative estimates because Dick Parsons is running the show," said analyst Youssef Squali, of First Albany Corp. "It will be his watch and so the company will have to make the numbers."
AOL, which had to lower its own bold revenue growth predictions for 2001, is now expected to forecast earnings growth in the low double digits and scale back on its revenue projections for this year.
A spokeswoman for AOL, parent of CNN/Money, declined to comment on the content of the call. Shares of AOL (AOL: up $0.37 to $31.95, Research, Estimates), off 45 percent from their 52-week high, gained marginally on Friday.
Analyst Tom Wolzien of Sanford Bernstein already anticipates 8-to-10 percent growth in EBITDA for 2002, or earnings in the low-to-mid $10 billion range. Problems for AOL include consolidation of AOL Europe, which could dilute earnings before taxes by $300 million-to-$400 million, while the termination of iPlanet, the alliance between Netscape and Sun Microsystems, will cut another $200 million, Wolzien said in a research note. A slump in cable advertising could eat another $250 million away from the company's projected bottom line.
New York-based AOL, which completed its mammoth merger with Time Warner in early 2001, is now also experiencing a slowing growth in subscriptions for its online service. AOL currently has 33 million subscribers. It added 6.4 million in 2001 but only expects to gain another 6 million this year.
"The business is maturing," said analyst Jordan Rohan, of SoundView Technology Corp. "This is something to be expected and AOL is doing the best it can by raising prices."
The company will likely clear the deck in its call Monday and acknowledge slowing growth in its cable and AOL unit, Rohan said.
Earlier this year, AOL had initially projected earnings EBITDA growth of 31 percent, or $11 billion, in 2001 and had said revenue would grow by as much as 10.5 percent, to $40 billion. But in September, the media company cut 2001 EBITDA growth to about 20 percent, with revenue rising 5-to-7 percent.
Lehman's Becker expects $40.6 billion in revenue and up to $11.6 billion in EBITDA for 2002. But she cautions that earnings may only reach $10.4 billion-to-$10.6 billion, or a growth rate of 4 percent-to-6 percent.
AOL's stock will become more attractive below $28 a share, she said.
"We are hard-pressed to find a catalyst that will move it higher until AOL begins to post improved results," she said in a research note.
Squali of First Albany is more bullish and expects EBITDA at AOL to gain by nearly 12 percent and earnings per share to come at $1.23 for the year. This is down significantly from Wall Street's current consensus of $1.30 per share for the year, compared with $1.18 in 2001.
Even with these trimmed expectations, AOL, with its business mix of 40 percent subscription, 24 percent advertising and the rest content, is still poised to withstand the economic downturn better than most of its media rivals, analysts said.
Disney in slump
AOL is not the only media company to feel the blows of the recession. Walt Disney Co. Chairman and CEO Michael Eisner, in a letter to shareholders Thursday, expressed his dissatisfaction with the company's stock performance last year.
"I want to make clear my disappointment with the fact that the overall equity value of the company as I am writing this has not risen as it has in the past," Eisner said.
Like AOL, Disney has some unique assets in its theme parks and television network ABC, which each took a hit in 2001. After the terrorist attack in September, attendance at the theme parks dropped nearly 30 percent but is now only off only 11-to-14 percent from a year earlier, SoundView's Rohan said.
Ratings for ABC have also plummeted and the network has fallen from the top primetime spot it attained in 2000 to No. 3, behind CBS and NBC.
At the same time, while ad subscriptions are showing signs of strain, AOL is gaining on the strength of its content, Wolzien of Bernstein said.
Film successes, including "Harry Potter," "The Lord of the Rings" and "Ocean's 11," are all helping AOL withstand the recession.
AOL is also a fully formed company because of its online capacity. In contrast, Disney has failed to move into the next distribution platform and may have to spend heavily to acquire online capability.
"Disney will need to have access to the home, through the Web, by buying Yahoo! or investing further in online operations," Wolzien said.
Shares of Disney (DIS: up $0.58 to $22.70, Research, Estimates), off nearly 36 percent from their $34.80 year high, gained nearly 3 percent Friday. 
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