Film gains but red ink flows at AOL

'Harry Potter' helps co. become #1 in B.O. receipts

NEW YORK — AOL Time Warner spilled more red ink in 2001, but eked out modest revenue growth, driven largely by a successful year for its film division.

Conglom’s full-year loss widened to $4.9 billion from $4.4 billion the year before; company hit scaled-down revenue targets, posting a 6% gain to $38.2 billion for the year.

AOL TW booked $1.8 billion in U.S. box-office receipts, making it the biggest movie company in the industry last year, with a substantial boost coming in the fourth quarter from “Harry Potter and the Sorcerer’s Stone” and “Lord of the Rings: the Fellowship of the Ring.” The DVD market was another source of strength: Warner Home Video boosted its unit sales by 57% in 2001 to 116 million.

Company’s top management, led by chief exec-elect Richard Parsons, took advantage of the year-end earnings announcement to lay out its long-term strategic vision, centering on subscriber growth in all its units and the mainstream rollout of broadband.

In a marathon meeting with investors in Gotham, Parsons, outgoing CEO Gerald Levin, operating chief Bob Pittman and financial boss Wayne Pace pinned the company’s future prosperity on integrating AOL TW’s myriad businesses to exploit its 148 million-strong subscriber base, making the whole worth more than the sum of its parts.

“We intend to manage this company as one company — a single integrated unit with one bottom line,” Parsons said. “Those who persist in looking at each of the pieces and then rolling up the value of the discrete parts over time are going to be increasingly mistaken.”

Saturation strategy

Pittman said efforts to cross-pollinate between units have already borne fruit: the company blitzed its AOL subscribers with so many “Harry Potter” promos that “if you looked at AOL during that period, you might have thought it was called the ‘Harry Potter AOL service,’ ” he said. Pittman said the saturation marketing helped “Potter” generate the biggest advance-ticket sales in history.

Even as he works to integrate AOL TW’s existing assets, however, Parsons isn’t ruling out a little window shopping for both content and distribution assets in the coming year. The exec alluded in particular to smaller players in the cable systems sector, where AOL TW was beaten out by Comcast in a bidding war for cabler AT&T Broadband.

Both AOL TW and Microsoft, which helped bankroll Comcast’s bid, have been salivating at the prospect of getting their broadband subscription services into consumers’ homes over high-speed cable lines. On the call, Pittman ran off a laundry list of potential high-margin broadband offerings, including video-on-demand, voice services, music, games and shopping.

Bad numbers

Conglom’s rosy outlook for the future was balanced by the ho-hum results for the fourth quarter and full year of 2001. Revenue was down from ambitious projections of 30% topline growth made at the outset of last year by Levin, thanks in large part to a dismal advertising market that impacted AOL TW’s print, TV and online businesses.

In the last quarter, revenues grew 4% to $10.6 billion, while losses widened by 55% to $1.8 billion.

In addition to the film division results, Pittman also credited company’s revenue growth to a 20% rise in America Online’s subscriber rolls, which ended the year with more than 33 million paying customers, and continued strength at Time Warner Cable, where revenues grew 18% for the year.

Warner Music Group had a less prosperous year: revenues fell 5% amid a general market downturn, coupled with the growing threat of online piracy. Still, the label group managed to end the year with three of the 10 biggest albums of the year, including the No. 1 seller, “Hybrid Theory” by rockers Linkin Park.

Ad slump subtracts

But the major drag on AOL TW’s numbers was, once again, the advertising market. Ad revenues at the conglom sank 3% in 2001, sucked lower by a precipitous 14% fall in the last quarter of the year. CFO Pace said cable ad spending was the lone bright spot in the picture, rising 32% as TWC added new programming to its channel lineup.

AOL TW reiterated its assumption that the ad market will remain flat to slightly down over the coming year, but Pittman maintained that the company was better positioned than its rivals to capitalize should the ad picture begin to brighten. In the meantime, the company hopes to capture share from its rivals in a shrinking market.

“Times like this lead to consolidation around the market leaders,” Pittman said. “We are definitely one of the market leaders.”

The company also stuck to the outlook it provided on Jan. 7 for 2002 results, including projections of 5% to 8% revenue growth and an 8% to 12% increase in cash flow, a measure of profitability without counting interest payments, taxes and various non-cash expenses. In the first quarter of 2002, Pace expects both revenue and cash flow to be flat.

Pace gave little new guidance on the $40 billion to $60 billion accounting charge that AOLTW has said it plans to take in the first quarter, except to say it would likely be in the middle of that range. The charge comes from a recent change in U.S. accounting rules that forces the company to write off the premium paid by AOL in its merger deal with Time Warner all at once, rather than gradually as it had planned.

Wall Street appeared nonplussed by the earnings news, bidding the stock 1% lower even as the broader market rebounded. AOL TW closed at $26.40, just 40 cents above its 52-week low.

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