Ted Leaves, But AOL's Woes Remain
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AOL Time Warner began its earnings report with the surprise, Ted Turner's departure, and then followed with the expected, AOL's woes.
The management shakeup came as AOL Time Warner reported the continued drag on its business from its struggling Internet unit -- the only business unit not to achieve double-digit growth in the fourth quarter.
Overall, AOL Time Warner saw 8 percent revenue growth to $11.4 billion. Earnings before interest, taxes, depreciation and amortization (EBITDA) rose 16 percent to $2.8 billion. The company's net loss was $44.9 billion, after taking a $33.5 billion charge for the decline in value of AOL and $12 billion of charges relating to other assets.
AOL continued to struggle. The Internet unit's EBITDA for the quarter was down 11 percent to $474 million, while revenues decreased 6 percent to $2.3 billion. For the year, earnings were off 22 percent at $1.8 billion and revenues were down 4 percent at $9.1 billion.
Most of the revenue decline can be laid at the feet of AOL's advertising business, which has dropped precipitously in the past year. For the fourth quarter, ad revenues declined 42 percent to $372 million. The company said advertising and commerce revenues at AOL declined a total of 39 percent for the year to $1.6 billion.
Subscription revenues grew 16 percent for the year, which the company attributed to its price hike in the U.S. and Europe. AOL ended the year with a total of 35.2 million subscribers, with 26.5 million in the United States.
However, AOL's once meteoric membership rises slowed markedly, with the company adding 1.2 million U.S. users during 2002. In fact, the company lost about 176,000 subscribers during the course of the quarter, normally a period of robust growth with the holiday season.
The decline follows that reported by Microsoft for its MSN service, which said its subscriber base remained stagnant since introducing MSN 8 three months ago. The company attributed the sluggishness to declining interest in narrowband Internet connections.
The subscriber numbers are below analyst expectations. In a research note issued this morning, Deutsche Bank analyst Douglas Mitchelson said he expected the company would end the quarter with 36.5 million subscribers worldwide and 27.3 million in the U.S.
AOL Time Warner's plan for turning around AOL hinges on conserving its dial-up base while building up its strength in broadband.
The company's other business units performed well. In cable, earnings grew 13 percent on 12 percent revenue growth during the quarter. The company increased subscription revenues by 14 percent over the year and launched video-on-demand services in most of its markets.
In the film unit, Warner Bros. and New Line released hits like Harry Potter and the Sorcerer's Stone and The Lord of the Rings: The Fellowship of the Ring. Earnings there rose 13 percent in the quarter. Warner Music increased its earnings by 25 percent during the quarter on 6 percent revenue gains. Networks' earnings increased 46 percent in the quarter on 12 percent revenue growth. Earnings in publishing increased 21 percent and revenues 18 percent in the fourth quarter.
"Once again, our traditional media businesses posted stellar results," he said. "I'm encouraged by the collective strength of the complete portfolio of industry-leading businesses."
The company said AOL would continue to act as a drag on these traditional media businesses in the near term. For 2003, revenues are forecast to remain flat and earnings would be down 15 to 25 percent. Advertising and commerce revenues are anticipated to be down between 40 and 50 percent.
"In 2003, the company will strive to run each of our businesses as well or better than before, with a continued major focus on stabilizing and revitalizing America Online," Parsons said.
Parsons confirmed that AOL Time Warner had sold off its stake in Hughes Electronics, in an attempt to cut its nearly $26 billion debt load. The sale to Bank of America will reportedly net the comapny $800 million. He said AOL Time Warner would continue to work to lower its debt in 2003 and reduce total debt to $20 billion by the end of 2004.