Wall Street pummeled shares of AOL Time Warner Inc. on Wednesday after the company reported that growth was slowing in most of its units, an indication that the New York media giant might no longer be immune to the sluggish advertising market and stagnant economy.
Ignoring a better-than-expected surge in cash earnings, investors focused instead on AOL Time Warner's slim 3% rise in revenue, to $9.2 billion, for the second quarter ended June 30. Analysts polled by First Call/Thomson Financial had expected the company--parent of HBO, Time magazine and CNN--to report $9.7 billion in revenue.
Worried that the slowdown might hurt the company's long-term prospects, investors drove the company's stock price down almost 10%, or $4.80 a share, in New York Stock Exchange trading. The stock closed Wednesday at $44.65.
"This is the first meaningful sign of economic sensitivity evidenced by AOL Time Warner and the first indication of discomfort with some of the company's projected financial guidance," said Fred Moran, analyst at Jefferies & Co. in New York. "If they can't drive revenue, eventually all other growth peters out."
AOL Time Warner Chief Executive Gerald Levin reiterated the company's 2001 financial goal of $40 billion in revenue and $11 billion in earnings before interest, taxes, depreciation and amortization, also known as EBITDA.
But to reach those targets, AOL Time Warner is counting on a much stronger second half. Key factors will include a 9% price hike for America Online subscribers--set to take effect this month--and the company's coming movies, including "Harry Potter" and "Lord of the Rings." A string of box-office hits could add $1 billion in revenue during the second half of the year, Moran said.
J. Michael Kelly, chief financial officer, said AOL Time Warner had always predicted that the bulk of its growth would come during the second half. "We shouldn't be halfway there yet," Kelly said, noting that the company's movie and music units generate most of their revenue in the fall and winter.
It is the latest Internet and media company to be hurt by the ad-spending slowdown. The company eked out a 1% increase in overall ad and commerce revenue, to $2.3 billion for the quarter.
Reaction on Wall Street might have been heightened because AOL Time Warner has long insisted that its business is not vulnerable to the same factors that have hurt rivals.
"We view this performance as positive relative to other companies in the industry, but somewhat disappointing relative to our expectations for AOL Time Warner," Merrill Lynch analyst Henry Blodget said in a report Wednesday.
The company reported a net loss for the quarter of $734 million, compared with a net loss a year ago of $924 million, assuming AOL and Time Warner had already combined their operations. The companies' merger was completed in January.
Company officials stressed that cash earnings-per-share rose 28% to 32 cents--or 4 cents higher than analysts expected. Second-quarter EBITDA rose 20% to $2.5 billion.
At the company's flagship AOL Internet service, revenue rose 13% to $2.1 billion. Some analysts had expected growth of 20%. EBITDA rose 37% at the online unit, to $801 million.
Time Warner Cable, the nation's second-largest cable operator, enjoyed the strongest revenue growth, rising 14% to $1.7 billion. EBITDA rose 13% to $777 million.
Company officials declined to comment on speculation that it might make a bid for AT&T; Broadband to counter an offer made last month by Comcast Corp. But analysts were not expecting it, in part because such a deal would face intense regulatory scrutiny.
Results for the company's filmed entertainment unit, including Warner Bros. and New Line Cinema, and its music division were among the most disappointing.
Filmed entertainment revenue rose 5% to $1.9 billion, and EBITDA grew 17% to $250 million. Music revenue fell 11% to $895 million, which the company blamed on an industrywide slump in music sales. EBITDA for the music unit sank 33% to $87 million.