AOL to Slash Revenues $190M

NEW YORK-- AOL Time Warner Inc., the world's largest media company, posted a third-quarter profit Wednesday, but said it would restate two years of results -- cutting $190 million in revenues -- due to accounting problems at its embattled America Online division.

Investors and analysts were surprised by the restatement but welcomed the company's speedy action only months after AOL Time Warner started an internal review into its online unit's accounting practices.

The review started just weeks after the U.S. Securities and Exchange Commission and Justice Department launched their own probes. In July, the company had said it may have improperly accounted for ad deals at America Online totaling $49 million.

The company's affirmation of its guidance on 2002 growth targets also boosted sentiment and shares of AOL -- home to "Sex and the City," pop star Madonna and People magazine -- rose 7 percent in heavy after-hours trade to $14.45.

"The stock is up because they didn't have to reduce guidance and they provided a little bit of assurance about the scope of impropriety," said SoundView analyst Jordan Rohan.

The company said its internal review is continuing.

"We have devoted a significant amount of time and resources to our review and, based on the substantial work we have done to date, do not expect any further restatements from it," said chief executive officer Richard Parsons.

So far, executives said they have sifted through about 70 percent of America Online's total ad and commerce revenue over the two-year period, starting before AOL agreed to buy Time Warner and ending in June 2002.

The restatement will cut the company's revenue by a total of $190 million and earnings before various items by $97 million, AOL Time Warner said. It will also cut America Online's already weak ad and commerce revenues by $168 million over the two-year period.

Instead of supercharging the other businesses, as had been envisioned in the early days of the merger, weakness during the third quarter at America Online offset strength from AOL's publishing, cable networks and film units, with strong video releases including "The Lord of the Rings: The Fellowship of the Ring."

AOL Time Warner reported third-quarter net income of $57 million, or 1 cent a share, compared to a net loss of $997 million, or 22 cents a share, a year earlier.

Revenue for the quarter rose 6 percent to $10 billion while its quarterly earnings, excluding costs such as noncash amortization expenses, fell to 19 cents a share from 24 cents a share a year earlier.

Earnings before interest, taxes, depreciation and amortization (EBITDA) -- a key measure of cash flow -- fell 1 percent to $2.2 billion from a year-earlier.

"Fundamentally, they hit just about every broad number, but if you look at them closely, America Online clearly disappointed. They had lower-than-expected subscriber numbers and ad/commerce revenue," said Kaufman Bros. analyst Paul Kim.

Kim said the rise in the share price was surprising given America Online's results, which were among the division's worst quarterly performances.

America Online's ad/commerce revenue dropped 48 percent and EBITDA slid 30 percent. Its subscriber base totaled 35.3 million -- below many analysts' estimates.

Results were reported on a pro forma basis to reflect the company's revamped cable pact with publisher Advance/Newhouse.

Despite the online unit's performance, the company reiterated expectations to post-2002 revenue growth within the previously announced range of 5 percent to 8 percent and 2002 EBITDA at the low end of its announced 5 percent to 9 percent range, as forecast in July.

Executives said strength in cable networks, publishing and film -- with releases including "Harry Potter and the Chamber of Secrets" -- would help it meet its targets.

The company also said it will outline America Online's turnaround plan and prospects at a special meeting on Dec. 3.

AOL Time Warner, which took a $54 billion charge earlier this year to reflect a decline in the value of its business, may also have to take another "substantial" impairment charge, said chief financial officer Wayne Pace.

While analysts said it could be in the billions of dollars, Pace said it was too early to estimate the size of the charge.

Executives said a charge would not affect its debt covenants, but Hal Vogel, head of Vogel Capital Management, was skeptical, noting that if the size of the assets are reduced, the balance sheet is not as strong.

"They are trying to regain credibility," Vogel said. "But they have to build a track record of trust and that lies in the future still."