For many AOL Time Warner investors, the most disconcerting news in the company's gloomy financial report on Wednesday was the disclosure that the problems had spread beyond America Online to Time Warner's cable systems.
The company told Wall Street to lower its expectations for growth, warning that the cable systems' advertising revenue was about to take two hits. Other AOL Time Warner units, it said, plan to cut back their advertising on the company's cable systems. And one-time advertising deals with new cable services are drying up.
PHOTO: NY TIMES
Those surprises, along with a US$10 billion write-down in the value of the cable systems, only deepened skepticism about the company. To some investors, they were echoes of the company's abrupt disclosures last year that AOL's advertising revenues were evaporating faster than the company had led them to expect.
Only this time, the grown-ups from the Time Warner side of the company could not blame the kids at AOL. And the timing could not be worse: AOL Time Warner plans to sell part of its cable operations to the public later this year in the hope of raising billions to trim its huge debts.
"The credibility questions had been focused largely on AOL, but now skepticism about credibility is spreading to the rest of the company," said Dennis Leibowitz, who runs ACT II Partners, a hedge fund that specializes in media companies but does not own AOL Time Warner shares.
Tom Wolzien, a media analyst at Sanford C. Bernstein, delivered a similar message to his clients.
"Once again," he wrote, "less than clear accounting/public relations practices for booking revenues easily cause a resurgence of 'what else is buried in there that I don't know about' questions from investors. The fact is that the company never indicated that there was a finite length to the advertising arrangements. "
AOL Time Warner shares fell more than 14 percent Thursday, closing at US$12. Besides the cable woes, investors were reacting to Ted Turner's resignation as the company's vice chairman and writedowns that produced a net loss for last year of nearly US$100 billion.
Analysts said the cable unit was still healthy and likely to resume solid growth in the next several years.
But the sudden emergence of questions about the business have pushed it toward the top of the long list of problems confronting Richard D. Parsons, the company's chief executive.
Edward Adler, an AOL Time Warner spokesman, said Thursday that earlier company filings had suggested that ad revenues from cable services would decline.
He said that the specifics had only now become clear.
Even when profits at the AOL online service began plummeting and questions were raised about its accounting, investors never worried about the health of AOL Time Warner's cable systems.
They matched industry leaders like Comcast and Cox Communications in stable earnings growth.
But those companies were accounting for the fees that they received from new cable channels differently than AOL Time Warner, analysts noted Thursday.
For example, when a cable service made a deal to be carried on Time Warner systems for five or 10 years, a significant part of the millions it paid went to buy advertising time. And Time Warner booked most of that revenue in the first year.
Comcast, by contrast, has not given cable services ad time in exchange for the fees they paid to have their channels carried. Instead, it has treated the fees as an offset to expenses and has booked the fees over the life of the contracts.
So AOL Time Warner's accounting approach, while allowed, sets it up for a big revenue drop, even as some cable rivals continue to enjoy benefits on the cost side, analysts said.
Jessica Reif Cohen, an analyst at Merrill Lynch, estimates that such fees accounted for about US$230 million, or 3.5 percent, of the roughly US$7 billion in revenues for the AOL Time Warner cable systems unit last year. But the fees had a disproportionate impact on profits, analysts said, because with no offsetting costs, they went directly to the bottom line. With the big burst in new cable networks now long past, Rief estimates that such fees will account for only US$50 million in revenues this year.
After Wednesday's disclosures, some analysts reduced their estimates for cable revenue and cash flow growth at the company to as little as 7 percent from 12 percent. The company told analysts to expect "high single-digit to low double-digit growth."
Slowing growth in the cable systems business could be a blow to the company's planned spin off of a stake in the operation later this year. The spinoff is intended to raise money to make a US$2.1 billion payment to Comcast to complete the unwinding of a joint venture, and to reduce the company's US$26 billion debt, as well.
One analyst estimated that a spinoff of 10 percent of the cable systems unit, which might have raised about US$4.2 billion last year, would fetch about US$3 billion today.
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