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JULY 24, 2003
Groping for a Plan at America Online [Page 2 of 2] WIZARDS AND RINGS. Fortunately for AOL Time Warner, its other businesses seem to be taking up the slack. The parent company's second-quarter revenues rose 6%, to $10.8 billion, thanks largely to the strength of its filmed entertainment and networks divisions. Operating income before depreciation and amortization also rose 6%, to $2.4 billion, excluding goodwill impairments. HBO shows reaped a record-setting 109 Emmy nominations this year, and filmed entertainment benefited from such blockbusters as The Matrix Reloaded and strong DVD sales of the Harry Potter titles and the first installment of The Lord of the Rings trilogy. Most important, Parsons appears on track to reduce the outsize debt load, which stood at $27 billion as of Jan. 1. During the second quarter, AOL announced the $1 billion sale of its CD-production unit, and analysts think an anticipated sale of AOL's Atlanta Thrashers of the National Hockey League and Atlanta Hawks of the National Basketball Assn. could fetch an additional $400 million. Add in previous sales of the Comedy Central network for $1.2 billion and the $750 million AOL received from Microsoft in a legal settlement, and Parsons will be about halfway to his goal of cutting debt to $20 billion by yearend 2004. Already, Parsons says, total debt is down to $24.2 billion. Such progress has gotten the attention of investors, who have bid the stock up 28% this year, to $16.85 at the closing bell on July 22. In retrospect, "there was way too much emphasis on the AOL division and all its problems," says Henry Berghoef, co-director of the Oakmark Select fund, which bought shares of AOL last year. Indeed, Merrill Lynch analyst Jessica Reif Cohen upgraded AOL from a hold to a buy on July 17, despite her prediction that America Online will lose 10 million dial-up subscribers by 2007. AOL shares fell after the earnings announcement on July 23, closing at down 6.7%, or $1.14, at $15.71. DELAYED IPO. Cohen thinks AOL Time Warner's 2003 earnings before interest, taxes, depreciation, and amortization (EBITDA) will come in at $9.28 billion -- up 6% from 2002 -- on revenues of $42.7 billion, up 4.4%. Her price target for the stock is $24. She figures that the America Online unit will contribute $1.52 billion in EBITDA, down 1% from 2002, with increased online advertising and cost-cutting measures offsetting an estimated net loss of 1.1 million subscribers in 2003. It's anyone's guess as to how AOL's stock would fare if the online unit could regain some of its old pizzaz. But it's clear that the parent company would more easily regain investors' respect. AOL Time Warner has had to delay an initial public offering of its cable business because of ongoing Securities & Exchange Commission and Justice Dept. investigations into alleged pre-merger accounting irregularities at the America Online unit. The cable IPO, whose $4 billion in projected proceeds Parsons plans to use to pay down debt, may be held later this year. So for the moment, the CEO finds himself in a familiar position:facing nagging questions about how he'll solve America Online's problems.
 By Brian Hindo in New York Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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