AOL Time Warner Lowers Forecast
Unveiling a new management team and a new strategy for playing the Wall Street expectations game, AOL Time Warner Inc. on Monday reduced its forecast for 2002 cash-earnings growth and said that in the future it will promise less and deliver more.
AOL also said it will take a one-time, noncash charge of $40 billion to $60 billion in the first quarter to comply with new accounting rules and draw on existing credit lines to pay Bertelsmann $6.75 billion for the 49% of AOL Europe it doesn’t already own.
The announcements came in a 90-minute conference call with Wall Street analysts after the close of the stock market Monday. The session served as a debut for Richard Parsons in his new role as designated successor to Chief Executive Gerald Levin, who will retire in May.
Perhaps in a sign that the media giant already had begun more skillfully guiding Wall Street, analysts last week began trimming their revenue and earnings expectations.
AOL shares gained 73 cents to $32.68 on the New York Stock Exchange, which analysts said partly reflected relief that the company would finance its AOL Europe purchase without having to issue new stock and dilute the holdings of current shareholders. AOL shares have fallen from a 52-week high of $58.41.
Parsons told analysts that AOL will see growth of 5% to 8% in revenue and 8% to 12% in earnings this year before interest, taxes, depreciation and amortization, or EBITDA, the most commonly used earnings measure.
Until recently, analysts had been expecting EBITDA growth of 15% or more. One of Wall Street’s most frequent criticisms of AOL has been its propensity to fall short of management’s ambitious revenue and earnings targets.
“We got no credit for our achievements [in 2001] because of the high expectations we ourselves created,” Parsons said. From now on, he said, “we will try not to over-promise, and we will deliver.”
Analyst Scott Reamer at SG Cowen Securities said, “This is all about resetting the bar, making sure that the new management team is able to regain the Street’s confidence.”
The noncash, first-quarter charge of up to $60 billion reflects the sharp drop in value of the assets AOL purchased when its acquisition of Time Warner was completed early last year. Under new accounting rules, AOL is required to reduce the amount of “goodwill” on its books--the difference between the assets’ purchase price and their market value--to reflect that decline.
The charge won’t affect AOL’s operations and will enable the company to save $7 billion a year in noncash goodwill depreciation costs, said Wayne Pace, AOL’s new chief financial officer.
Dragged down by a terrible advertising environment in the third and fourth quarters, AOL said its full-year EBITDA for 2001 is expected to come in at slightly below $10 billion, or 18% above the 2000 figure. Analysts had been expecting 20% growth. The official earnings figures will be released Jan.30.
In line with AOL’s new conservatism on forecasts, Parsons said the company’s 2002 outlook anticipates no recovery in the U.S. economy and no rebound in the advertising industry.
AOL expects to achieve its earnings growth mainly from anticipated gains in its subscriber base and its strong film division, Parsons said.
