Analysts on Watch for AOL’s Net Results
Wall Street, never long on patience, will be poring over AOL Time Warner Inc.’s second-quarter earnings Wednesday with a gimlet eye on the handiwork of Jonathan Miller.
A year ago, the 46-year-old was brought on board as chief executive of the media giant’s limping America Online division. A few months later, Miller announced a turnaround plan -- and skittish investors are looking for signs that AOL is attracting, not only losing, subscribers.
“If we don’t see a significant pickup in the next six months, the pressure is really going to mount,” said Matt Davis, broadband director of Yankee Group. Davis is one of many analysts anxious to know whether AOL has begun to lure fleeing dial-up customers to its new broadband services before rivals can grab them.
Over the next four years, AOL could lose more than 10 million of its 26 million dial-up subscribers, and that probably will be only modestly offset by gains in broadband customers, according to a research report last week by Merrill Lynch analyst Jessica Reif Cohen.
Nevertheless, Cohen upgraded AOL Time Warner stock to a “buy” from “neutral,” predicting that declines in earnings growth at the Internet unit won’t be as much of a drag on the parent company as she previously estimated.
Based on the trading of other entertainment companies, Cohen set a target price for AOL Time Warner of $24 a share.
AOL Time Warner shares closed Friday at $16.74 on the New York Stock Exchange.
Miller, who came to AOL Time Warner from USA Interactive, now known as InterActiveCorp, has been afforded something of a grace period to gather an executive team and ramp up marketing. He also bought time by impressing Wall Street with his ability to squeeze expenses at the Dulles, Va.-based division, which accounts for about $9 billion, or 22%, of the conglomerate’s roughly $41 billion in annual revenue.
By trimming jobs in addition to marketing, customer service and network costs, Miller pleasantly surprised Wall Street earlier this year by reporting a stronger cash flow in the first quarter than most analysts were expecting. And he has promised to do more cutting, if necessary.
“As long as he continues to show good cost control and the margins hang in there, people will give him the benefit of the doubt,” said Michael Gallant, analyst at CIBC World Markets.
Gallant reckons that 500,000 to 600,000 dial-up customers will drop out in the second quarter. That would be the first year-to-year decline in AOL subscribers. The analyst also anticipates the unit will show a 15% decline in earnings before interest, taxes, depreciation and amortization a widely watched measure of company performance.
Still, Gallant said he is willing to reserve judgment on Miller’s success or failure for at least another few months. “The September quarter will be the real benchmark,” he said.
Miller and other AOL Time Warner officials declined to comment in advance of Wednesday’s earnings announcement.
As Internet users shift to faster connections, America Online can do little to stop people from quitting its $23.90-a-month dial-up business. But analysts want to see that AOL is retaining some of those longtime customers by signing them up for its broadband products. Among the most anticipated figures that may be released this week is exactly how many broadband customers the company has captured.
In the past, AOL has been reluctant to release broadband figures on a regular basis, leading analysts to speculate that the numbers are soft.
“We’ve always had trouble pinpointing exactly what they’ve got,” said Mark Kersey, senior broadband analyst at Current Analysis. “Depending on how you count it, they either have 600,000 or 4 million subscribers. It all comes down to methodology.”
AOL said in December that about 650,000 customers were paying about $55 a month for high-speed access, but the company hasn’t released figures since then.
Analysts also are eager to hear how many people have signed up for AOL’s “bring-your-own-access” plan, a key element of Miller’s turnaround strategy.
Rather than competing head-on with cable companies to sell high-speed access directly to Internet users, AOL is aggressively pushing its BYOA plan. Priced from $9.95 to $14.95 a month, it lets dial-up defectors keep their AOL accounts -- including e-mail, instant-messaging and other features -- when they move to other broadband providers.
“That’s the most important number for me since that’s the thing they’ve actively been pushing,” Kersey said.
AOL has offered the BYOA plan for years, but began heavily marketing it only this year. The company has yet to release exact subscriber figures.
AOL is expected not only to update its broadband figures this week, but also to unveil a clearer methodology for tracking its business. Analysts also expect updated subscriber figures for new premium services, such as voicemail, anti-virus protection and MusicNet, an online music service.
At the end of this month, AOL will unveil its latest version, AOL 9.0. Designed to attract high-speed users, it will include tougher anti-spam controls, animated buddy icons and the ability to transfer files and photos via instant messaging.
