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10K filings reveal TW, Viacom woes

Fewer subs doesn't bode well for AOL's bottom line

Like a barrage of end-of-semester term papers, media companies filed their year-end financial 10K reports to the Securities & Exchange Commission by the Monday deadline. In the process, Time Warner and Viacom revealed a few awkward tidbits that may give investors pause.

The hefty documents often disclose in writing what executives omit or gloss over in their quarterly earnings calls.

Time Warner, in its 221-page filing, inserted a strong dose of caution about online service AOL, noting the slow erosion of its subscriber base will continue, exacerbated by aggressive competition from rival broadband dial-up Internet service providers.

In its 10K, company noted last year’s “transition” at AOL, which saw total U.S. subs fall by 2.2 million to 24.3 million, will continue in 2004.

America Online continues to be the weakest link for Time Warner, and in its filing, the company noted that if America Online is unsuccessful in its efforts to turn around its business, Time Warner’s financial condition could be “adversely affected.” With its primary dial-up service caught in the middle between discount ISPs like NetZero and broadband offerings from telcos and cable providers, the total number of AOL subscribers declined in 2003 from 26.5 million to 24.3 million, a process the company euphemistically explained by saying, “AOL’s subscription trends have been in transition.”

Division’s main hopes for growth are pinned on premium services that allow users to connect to AOL on top of broadband service provided by others. This “bring your own access” plan is priced significantly cheaper than the regular AOL service, however.

The trend doesn’t bode well for AOL’s bottom line, as Time Warner admitted in its 10K: “The company anticipates that this decline in its narrowband subscriber base will likely continue. … In addition, the movement toward AOL broadband services could negatively impact future results of operations due to lower average pricing on broadband services than for narrowband services.”

Revenues are not being helped by an online advertising slump, which plunged from $1.3 billion in 2002 to $787 million in 2003, a reversal of the upward trend seen by competitors such as Yahoo! Company attributed the decline in part to the end of a number of long-term contracts it had with marketers, a practice that flourished during the dot-com boom but is rare now that advertisers have significantly more power. The only advertising bright spot came from AOL’s relationship with Google, which produced $200 million in search-related marketing revenue in 2003, up from $35 million in 2002.

Viacom admits cash-flow slowdown

Viacom, in its 360-page tome, revealed that cash flow may grow less than 10% this year.

The slowdown, which Fulcrum analyst Rich Greenfield believes will put extra short-term pressure on Viacom’s already slow-growing stock, is largely due to higher-than-expected capital expenditures at Blockbuster and a 2004 tax bill that could be $500 million-$700 million higher than last year’s.

Fulcrum reckons the 31% increase in capital spending plus the bigger tax hit could leave Viacom with relatively flat free cash flow of just under $3 billion. In 2003, Viacom reported free cash up a hefty 15% from 2002.

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