Expecting More from AOL Time Warner

After issuing an upbeat report about America Online, Deutsche Bank has
now upped its expectations on the outlook for its parent, AOL Time Warner
, by about $300 million in cash.

In a research note published Tuesday, DB analysts Douglas Mitchelson and
Brett Peven said they were raising their 2004 cash earnings estimate by $300
million to $9.923 billion from $9.281 billion for the media giant, based on growth forecasts in every unit of AOL Time Warner except for publishing. That’s despite the loss in cash flow from the sale of the company’s DVD/CD-making unit.

In addition, the note named the company’s AOL division as contributing to
over one-half of the improved outlook for next year.

The note said it expected AOL Time Warner to reaffirm or even raise its
guidance when it releases its second quarter earnings Wednesday.

For the second quarter, Deutsche Bank is forecasting cash earnings of $2.3 billion, which, even though is up $28 million from its previous estimate, is still essentially
flat compared to the same time last year.

It also raised its earnings per share estimate to 10 cents, up from its
previous 8 cents per share expectation, which it said did not include gains
from the company’s Microsoft settlement and the sale of its Comedy Central
network.

The extra outlook is due to better than expected trends at AOL (mainly
more aggressive cost cuts than previously expected), the success in its film division with the box office gross of its second Matrix movie and a “strong network ad market” for the cable and network divisions, DB said.

As for AOL’s subscriber numbers, DB is forecasting U.S. subscriber
declines of 476,000, after a decline of 289,000 in the first quarter.

“We do not expect this acceleration in sub losses to continue as the war
seemed to have a significant impact on new registrations, which has
moderated during the summer,” wrote the analysts, who are expecting 374,000 and 381,000 losses in the third and fourth quarters, respectively. In all, they expect AOL to lose 1.52 million subscribers for the year.

But on balance, “we believe that results for AOL over the next two quarters will give investors significantly greater visibility for the division,” said DB, which maintained its expectations for the rest of 2003.

As is customary for investment notes these days, DB also noted that it does seek investment banking business from the company, whose price target was raised from $19 to $21.

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