Street Will Watch AOL Ad Performance

UBS Securities media analyst Michael Morris maintained his “buy” rating and 12-month price target of $25 on Time Warner Inc., but cautioned that the Street will be closely monitoring the progress at its AOL online unit.

Time Warner will release second quarter results on Aug. 1. In a report, Morris wrote that he expects revenue to rise 6.1% to $11 billion and adjusted operating income before depreciation and amortization, a measure of cash flow, to rise 16.7% to $3 billion, largely driven by gains at its cable operations and networks.

But Morris added that AOL’s growth, particularly in the advertising business, will be a key factor in its future prospects.

The former America Online began its shift from a subscription-based business to an advertising-based model in August 2006, and so far the results have been encouraging.

But increasing competition, especially from social networking sites like MySpace and Facebook, and the higher risk of traffic erosion prompted Morris to reduce his second quarter advertising growth estimate for AOL from 28% to 25%.

In his report, Morris noted that monthly unique visitors to the AOL site declined from 93.2 million in April to 91.4 million in May and that monthly usage minutes on the site fell from 32.7 billion to 30.2 billion during the same time frame.

“Though we are not overly concerned about the declining monthly usage numbers, we believe that a more conservative outlook is warranted,” Morris wrote.