AOL Posts Biggest Quarterly Profit

AOL Time Warner Inc. said Wednesday that it logged its biggest quarterly profit since the 2001 merger that created it, though the America Online Internet service continued to shed huge numbers of subscribers.

The world’s largest media company raised slightly its full-year outlook for operating income before depreciation and amortization, seeing growth in the “mid-single digits” instead of no gain at all. It left the revenue forecast unchanged, predicting an increase in the mid-single digits over $41 billion for 2002.

Second-quarter net income was $1.06 billion, or 26 cents a share, up from $396 million, or 9 cents, in the same period last year. The results included about $760 million from a legal settlement with Microsoft Corp. and pretax gains of $542 million on the sale of AOL Time Warner’s half interest in the Comedy Central cable channel.

But even without those one-time gains, profit exceeded Wall Street’s expectations.

Revenue was up 6% to $10.8 billion, helped by a blowout quarter for the Filmed Entertainment division and led by the release of the sci-fi sequel “The Matrix Reloaded.” Company officials said the film has pulled in $700 million worldwide.

At the same time, the troubled America Online unit lost a surprisingly high 846,000 dial-up subscribers in the quarter. Fahnestock & Co. analyst Peter J. Mirsky said company officials probably were caught “off guard” by the number, as they had been expecting the subscriber base to shrink by about 500,000.

AOL ended the quarter with 25.3 million dial-up subscribers.

The company said the Securities and Exchange Commission, in a probe that has been going on for a year, made a preliminary finding that AOL wrongly accounted for $400 million from the sale of AOL Europe to Germany’s Bertelsmann. The company said it believed it booked the disputed transaction correctly, as AOL advertising revenue, but said it may be forced to restate results.

The SEC investigation has delayed a proposed spinoff of AOL Time Warner cable-TV properties, but Chairman Richard Parsons said in a conference call Wednesday that the deal was no longer considered urgent.

A public offering of cable-only stock had been proposed as a way of reducing debt and dissolving an AOL Time Warner partnership with Comcast Corp., which owns 21% of Time Warner Cable.

The cable IPO may still make sense, Parsons said, but the timing would depend on “strategic considerations rather than balance-sheet imperatives.”

The company has made progress in its debt-reduction efforts, he said, lopping $2.1 billion off long-term debt during the quarter to leave the June 30 total at $24.2 billion. This month, AOL Time Warner announced another such move: the $1.05-billion sale of its DVD and CD manufacturing operations.

At America Online, part of the turnaround strategy has been to capture customers when they inevitably migrate from pokey dial-up services to zippier broadband.

The company said it signed up about 170,000 customers to its proprietary broadband access service, less than some analysts expected. But Mark Kersey, senior broadband analyst for Current Analysis in La Jolla, noted that along with its new “bring-your-own-access” plan -- which lets dial-up defectors keep their AOL accounts when they move to other broadband providers -- AOL appears to have added about 300,000 broadband customers during the quarter. Kersey said that was fairly good.

Mirsky, the Fahnestock & Co. analyst, said he was somewhat mollified by the company’s explanation for the loss of dial-up customers, which was that much of the contraction resulted from a “clean-up” in which nonpaying customers or those who had been suspended for online-community rule violations were stricken from the rolls.

In New York Stock Exchange trading, AOL Time Warner shares lost $1.14, closing at $15.71, on volume of more than 45 million shares.