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AOL Time Warner Q2 Profit Jumps

Profits for AOL Time Warner almost tripled to $1.1 billion, or 24 cents per share (23 cents per diluted common share) for the second quarter of 2003, despite a bigger than expected loss of subscribers in its AOL division.

The results, which include $277 million worth of charges, were sharply higher than its net income of $394 million, or 9 cents per share, for the same time last year. With discontinued operations removed from the balance sheet, the company's profit was $396 million, 9 cents per basic share during last year's second quarter.

Its net income was also helped by its settlement of litigation with Microsoft and continued cost-cutting in the AOL division, which had 1.2 million fewer subscribers compared to the same time last year. During the quarter, AOL lost 846,000 subscribers, much more than Wall Street was expecting.

Revenue rose by close to 6 percent to $10.8 billion from $10.2 billion during last year's quarter, led by increases in the company's film, networks and cable divisions, especially its "Matrix Reloaded" movie, which has so far taken in $700 million in worldwide box office sales, company officials said.

But revenue in the AOL unit fell by 6 percent to $2.1 billion compared to last year's second quarter, while its operating income (before depreciation and amortization charges) fell by 9 percent, as the expected decline in its ad revenues and other commerce revenues for the year played out.

As of June 30, AOL counted 25.3 million U.S. subscribers, a drop of 1.2 million from the same quarter last year. Its decline of 846,000 subscribers during the quarter was higher than expected. But AOL said about 45 percent of the decline was due to efforts to remove non-paying members who had signed up on lengthy free trials.

In Europe, AOL counted 6.2 million members, which was an increase of 238,000 compared to the year-ago quarter, but a drop of 52,000 from the first quarter.

Although subscription revenues improved by 6 percent to $1.9 billion, helped by currency exchange rates in European markets and growth in its broadband subscribers, which now number 2.2 million, the online unit's sharp drop in advertising revenues more than offset those numbers, the company said.

AOL took in $179 million worth of advertising revenue for the quarter, about 48 percent less than $342 million worth of advertising during the same time last year. Much of that drop was because AOL has changed its method of booking inter-company ad revenues as well as bartered advertising deals, company officials said.

For example, about $140 million worth of long-term advertising contracts left over from the dot-com heyday were removed from the company's revenue sheet during the quarter, as it had previously warned.

Wayne Pace, chief financial officer of AOL Time Warner, said because the AOL unit has changed how it accounted for bartered advertising deals from prior years, and is not renewing out older ad deals left over from the dot-com bubble days, the division still had $280 million of advertising commitments from that time to honor, compared to $422 million it had backlogged in the same quarter of last year. Absent those deals, "we've had a pretty good year," he said. "The fact is we're selling more advertising now than we sold the year before."

Don Logan, chairman of the AOL Time Warner's media & communications group, which includes the AOL unit, said backlogged advertising deals are no longer considered a meaningful metric to track because many of those bartered deals from the dot-com bubble days are not coming back. "The fact is, we're not selling that way anymore," he said. The contracts are "all burning off." Logan also suggested the end of the backlogged ad contracts couldn't come soon enough.

"A lot of those deals burn up inventory in prime spaces that we would like to sell to others, and chew up so much that we can't bring in new customers to (the site's ) real estate as we would like to." So as the prior advertising contracts are not renewed, the company is bringing in new advertisers that can pay fair CPMs (cost per thousand impressions), Logan said.


Regarding expectations for the rest of the year in the AOL unit, the company said it expects revenues to be down to "mid-single digits," as compared to $9.1 billion in 2002. Advertising revenues are expected to be down between 35 percent and 45 percent, compared to $1.3 billion in 2002. The company said its AOL outlook does not include the impact of any future merger and restructuring charges and sales and acquisitions of operating assets that may happen.

The company also said that the Securities and Exchange Commission has let it know it disagreed with how the company accounted for two deals worth $400 million of advertising that it struck with media giant Bertelsmann. While AOL Time Warner officials said they disagree with the SEC's assessment, it is likely that a restatement of its balance sheets could result.