AOL Posts Positive Surprise

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AOL Time Warner Inc. reported surprisingly strong first-quarter results last week, offsetting the weakened advertising market with solid performance from its cable and Internet units.

In the middle of an advertising slump that has stopped revenue and cash-flow growth at other Internet and media companies, AOL Time Warner reported sales growth of 9 percent to $9.1 billion and a 20 percent rise in cash flow to $2.1 billion.

That performance — coupled with the Federal Reserve Board's interest-rate cut — helped drive AOL Time Warner shares up nearly 12 percent, or $5.10 per share, to $49 each on April 18. The stock rose another 90 cents per share on April 19 to $49.90.

AOL Time Warner CEO Gerald Levin had a one-word explanation for the company's growth: subscriptions.

"Subscriptions are at the heart of our business model," Levin said in a conference call with analysts. "The P&L model for subscriptions, whatever the market conditions, is the opportunity for annuity-like characteristics."

Those traits include better pricing flexibility, improved acquisition and retention economics and the opportunity for premium pricing, Levin said.

Subscriptions — which rose 16 percent, to 133 million during the period — were the mantra during the conference call, with Levin bringing up the word at practically every opportunity.

But, in a way, subscriptions characterize the transformation that has taken place at the company since its $124 billion merger was completed in January. The new AOL Time Warner is focusing on getting each customer to buy as many of its products as it possibly can. One customer can be responsible for several subscriptions to Internet services, magazines, cable services, premium networks and so on.

While some of its peers — especially in the Internet space — have been reeling, AOL Time Warner is chugging along at a considerably quick rate. And Levin said the company is on track to achieve its goals of $40 billion in revenue and $11 billion in cash flow by year's end.

On the cable side, Time Warner Cable reported revenue of $1.6 billion, up 12 percent from $1.4 billion a year ago. Cash flow at the cable operation was $768 million, up 15 percent from $666 million in 2000.

During the quarter, Time Warner Cable added 400,000 digital subscribers, for a total of 2.1 million, and 237,000 high-speed data subscribers for a total of 1.2 million.

Levin called the cable infrastructure the "building blocks for almost everything we're talking about."

At the networks, including TBS Superstation, Turner Network Television, Cartoon Network and The WB Network, revenues climbed 6 percent to $1.7 billion, while advertising and commerce revenues increased 1 percent to $589 million. Cash flow grew 34 percent to $449 million, up from $335 million in the same period last year.

Advertising revenue was up about 17 percent at the cable systems, which Levin attributed to growth in local advertising and AOL Time Warner's ability to offer its advertisers multiple platforms.

"Basic cable is a strong opportunity for us," Levin said. "Local cable has the advantage. Even on an annualized basis, the revenue line is very strong."

Leading the charge for subscriptions was the AOL Internet service, which boosted subscribership by 2 million in the period, ending with 28.8 million customers. Average customer usage of the AOL service also was up, to 70 minutes per day from 64 minutes per day in the previous quarter.

And despite an industry-wide advertising slump, AOL Time Warner managed to post a 10-percent overall increase in advertising and commerce revenue in the period, fueled by substantial growth at the AOL division.

Advertising and commerce revenue at AOL rose 37 percent in the period, to $721 million. AOL Time Warner chief financial officer Michael Kelly said the growth in that unit was no accident.

"These guys don't do business like Yahoo! [Inc.] does," Credit Suisse Lyonnais USA analyst Richard Read said. "Their advertising and commerce revenue is based on large scale interrelationships with clients. They're not as subject to rate pressure."

That's because AOL actually gets money every month from Internet subscribers.

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