AOL Tops Expectations in Q3 Despite Widening Loss

Media giant AOL Time Warner (NYSE: AOL) on Wednesday reported third-quarter pro forma earnings and revenue that topped expectations, though the company posted a net loss for the period ended September 30th as advertising revenue declined.

Company officials had previously said Monday that AOL remains on track to meet its lowered expectations for this year and next.

AOL shares slipped in morning trading Wednesday, losing $1.39 to $32.11 early on. Analysts at Merrill Lynch reportedly downgraded the stock's near-term outlook to neutral from buy following the quarterly report, citing a poor outlook for advertising.

Merger Costs Remain

AOL said earnings before income taxes, depreciation and amortization (EBITDA) rose to US$2.5 billion, or 30 cents per share, from pro forma earnings of $2.1 billion, or 21 cents, in the same period last year. Analysts had expected the company to earn 26 cents per share.

Revenue rose to $9.3 billion from $8.8 billion in the year-earlier quarter.

However, AOL's net loss for Q3 2001 totaled $996 million, or 22 cents per share, including $134 million in merger costs and $196 million in pre-tax, non-cash charges for investment writedowns. The loss for the year-earlier quarter was $902 million, or 21 cents per share.

Subscriptions Gain

A 13 percent increase in subscription revenue contributed to the revenue gain, AOL said. The company reported that more than 137 million people subscribe to its services, including America Online, Time Warner Cable TV and Road Runner cable modem Internet service, up 18.2 million from a year ago.

Advertising and commerce revenue fell 5 percent, amid an industry-wide slowdown. Company officials said on a conference call with investors and analysts that the ad slump was exacerbated by the climate created by the September 11th terrorist attacks on the United States.

On September 24th, AOL warned that the tragedy would hurt earnings.

Shares Fall

Chief financial officer Mike Kelly, on the conference call with investors, said the advertising market "continues to look weak."

However, chief executive officer Gerald M. Levin said the company's performance this quarter "underscores the continuing power of (its) subscription businesses, as well as (its) excellent performance in filmed entertainment and continuing focus on controlling costs across the board."

Diversification Foundation

Said Levin: "The keys to our success in this difficult environment are clear. AOL Time Warner greatly benefits from the diversity of our revenue streams and the quality of our assets, built on a strong strategic and financial foundation."

Kelly said the quarter's results were "more impressive, given the backdrop of the difficult environment in which they were delivered."

The company's diverse businesses -- which range from movie studios, to magazines, to television networks, to Internet services -- give the company the ability to leverage its various relationships to boost business even while cutting costs, he said.