AOL Time Warner Inc, the biggest media and Internet company, had a US$1.82 billion fourth-quarter loss on higher expenses and a decline in advertising at its America Online service, magazines and television networks.
AOL Time Warner shares fell as much as 10 percent, and some investors said there's concern about the company's accounting because of a planned merger-related writedown this period.
The fourth-quarter loss widened to US$0.41 a share, from US$1.09 billion, or US$0.25, a year ago. Sales rose 3.9 percent to US$10.6 billion, helped by the success of films such as Harry Potter and the Sorcerer's Stone. Ad sales slipped 14 percent, crimping revenue growth at magazines such as Time and cable-TV networks like CNN. The ad slump led Chief Executive Officer Gerald Levin to twice reduce last year's financial forecasts. His successor, Co-Chief Operating Officer Richard Parsons, says things won't improve anytime soon.
"To expect radical changes in the short term isn't practical," Parsons said on a conference call with analysts today. "This is not an overnight phenomenon."
AOL Time Warner shares fell US$0.30, or 1.1 percent, to US$26.40 on Wednesday. They had dropped to US$24 earlier in the day, setting a 52-week low. The stock has lost more than half its value in 12 months.
AOL Time Warner said Jan. 7 it will take a first-quarter writedown of US$40 billion to US$60 billion to reflect a decline in the company's market value since it was formed last January by America Online Inc's US$124 billion purchase of Time Warner Inc.
The charge will likely fall in the middle of that range, Chief Financial Officer Wayne Pace said on Wednesday's call.
Crit Thomas, who manages US$2.6 billion at Armada Funds in Cleveland, said he has reduced his AOL Time Warner stake because the writeoff may prompt a closer look at the company's balance sheet. He wasn't more specific.
"Two very large companies were put together, there were lots of writeoffs and you need to review the assumptions for those writeoffs," Thomas said.
Shares of companies ranging from Tyco International Ltd to General Electric fell on Wednesday amid worries about whether investors can trust the accounting of many companies following the collapse of Enron Corp.
"This ain't no Enron," Parsons said in an interview. "I'm not an accountant, but I'm a banker and I know how to read a balance sheet. There are no lurking accounting scandals."
AOL Time Warner will give more details on performance, however, to make the company's operations more transparent, he said.
"I am very much aware of the generalized concerns about Enron and Global Crossing, so we'll be more transparent with how the company has performed," Parsons said.
AOL Time Warner's amortization costs in the latest quarter totaled US$1.88 billion. The company also had US$1.7 billion in pretax expenses to write down the value of investments, primarily stakes in Time Warner Telecom Inc and Hughes Electronics Corp.
Excluding those and certain other costs, profit rose to US$0.33 a share from US$0.28, the company said. That matched the average estimate of analysts surveyed by Thomson Financial/First Call. The figures don't conform with generally accepted accounting principles.
The company repeated its forecast from Jan. 7 that sales this year will rise 5 percent to 8 percent and cash flow will increase 8 percent to 12 percent. The company said it assumes the economy won't recover this year. Parsons told analysts on the conference call to expect less quarterly guidance, part of his aim to shift attention to long-term results.
"Any time a company is giving less information than they did last year, investors must ask why," said Soundview Technology Group analyst Jordan Rohan, who has a "buy" rating on the shares and doesn't own any personally.
Cash flow, or earnings before interest, taxes, depreciation, amortization and other items, rose 14 percent to US$2.8 billion in the recent quarter. Some analysts and investors use cash flow to measure the performance of indebted, acquisitive companies because it excludes interest payments and noncash charges such as amortization of goodwill.
Advertising and commerce revenue fell to US$2.2 billion in the quarter, accounting for 21 percent of total sales. Advertising sales at America Online, the biggest Internet service, dropped 7.1 percent to US$637 million.
That decline comes after America Online posted years of quarterly advertising gains as corporations sought to reach its 33.2 million subscribers. Many Internet-related companies went out of business during the past year, while other customers pared spending, crimping ad sales at the Internet unit.
"AOL was not and is not in any way immune from the deep and ongoing advertising downturn," said JP Morgan Securities analyst Paul Noglows, who rates the shares "buy" and owns them personally.
The company's subscription sales rose 16 percent to US$4.4 billion in the quarter, aided by 1.9 million new America Online users. Subscriptions accounted for about 42 percent of overall sales.
AOL Time Warner's networks unit, including CNN and HBO, increased sales 3.7 percent, helped by 1.2 million new HBO customers.
Sales at the America Online unit rose 9.7 percent to US$2.26 billion, as the increase in customers helped offset the ad decline. AOL is adding subscribers at a slower rate than last year.
"Sustaining Internet access growth in a maturing market and accelerating [high-speed Internet] access growth represents their biggest challenge," said Jefferies & Co analyst Fred Moran, who has a "buy" rating on the stock and doesn't own the shares personally.
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