Bottom line offline at AOL

Accounting issues, gov't inquiries knock stock

AOL Time Warner disclosed Monday that troubled America Online won’t meet full-year financial targets due to softness in the ad market. But strong perfs at other divisions will keep overall numbers in line with Wall Street expectations.

AOL TW shares slumped in early trading but finished higher, as a round of investor buying buoyed the market. The stock closed up 1.5% at $13.33 after tumbling to $12.52 during the session.

Falling short of expectations has been the company’s nemesis ever since its merger when execs stuck to unrealistic forecasts too aggressively and for too long. But chairman-CEO Richard Parsons has been getting points recently for open communications instead of nasty surprises.

Still, the stock has taken its knocks from concern over America Online’s accounting and investigations by the Securities and Exchange Commission and Dept. of Justice.

AOL TW’s chief financial officer Wayne Pace late Monday promised investors information that is “timely,” “accurate” and “understandable.” He said during a media conference in Miami that the conglom is striving to be “open,” “candid” and “honest” with ratings agencies and Wall Street.

Internet ads not back

AOL’s ad and commerce revenue is now tracking at $1.7 billion for the year vs. previous guidance of $1.8 billion to $2.2 billion. And there’s an additional 5% “downside risk” to the latest estimate, the company said, indicating that Internet advertising won’t rebound anytime soon despite increasingly upbeat forecasts for the overall ad market.

“Online advertising is less sensitive to the economy” and will trail any uptick in the economy, Pace said. The focus has been on realigning the sales force and rethinking the basics of the Internet business model.

And he implied that AOL Latin America, which is short of cash and likely to be delisted from the Nasdaq stock market, could be jettisoned if its financials don’t improve.

“We will need to focus on Latin America … If we don’t see imminent returns there, we will consider” more drastic alternatives., he said.

Jonathan Miller, a former exec at Barry Diller’s USA Networks, was recently appointed to run the unit and is expected to announce a restructuring and management reshuffle within a week. He reports to Don Logan, former Time Inc. topper, who was appointed in July to oversee all the giant conglom’s subscription businesses.

Responsible growth

“Don wants profitable, responsible and sustainable growth,” Pace said.

Some on Wall Street fear more bad news is coming. “Segment results have yet to hit bottom — business is not improving — and management does not fully have their hands around segment problems,” said Merrill Lynch analyst Jessica Reif Cohen.

However, growth at its other divisions — which include Warner Bros., Turner Broadcasting, Time Warner Cable and Time Inc. — means 2002 revenue growth for the whole company will still fall within a previously announced 5% to 8% range. Cash-flow growth will come in at the low end of a 5% to 9% range.

For the third quarter, the company sees revenue up in the mid-single digits and cash flow down in the low single digits.

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