AOL TW's Profit: Good Sign


AOL Time Warner Inc. began a long walk out of the woods last week, posting a first-quarter profit of $396 million (9 cents per share) and showing signs of getting its America Online Internet unit under control.

That first-quarter profit was a big change from the $54 billion loss the media giant reported in the fourth quarter, after writing down the value of AOL assets.

CEO Richard Parsons also said that the twice-delayed initial public offering for its Time Warner Cable unit would get pushed back again — this time to the second half of the year.

AOL, which has been besieged by accounting inquiries and subscriber defections, lost about 290,000 online customers in the first quarter. But it reported an 18% increase in cash flow — on a 6% rise in revenue — that appeared to be the fruit of aggressive cost-cutting initiatives.

Parsons upbeat

"This is the first time AOL's numbers have not surprised us on the downside, so the initial signs that management has the unit under control are emerging," Salomon Smith Barney Inc. analyst Jill Krutick wrote in a research note.

Parsons appeared upbeat at a Wednesday meeting and conference call with analysts.

His message was clear: to reduce debt through the sale of assets and cost-cutting initiatives at existing units.

Total debt for the quarter was $25.8 billion — lower than many analysts predicted, given that AOL had to shell out $2.1 billion in cash last month to Comcast Corp. as part of the restructuring of the Time Warner Entertainment L.P. partnership.

The sale of its 8.4% stake in Hughes Electronics Corp. earlier this year for $800 million helped soften that blow.

"We're very comfortable where we are on our overall debt-reduction program," Parsons said.

Paring debt

Parsons pledged in January, during his fourth-quarter conference call with analysts, to reduce debt from $26 billion to $20 billion by the end of 2004.

He's making progress, having raised about $800 million through the Hughes stake. The pending sale of AOL Time Warner Inc.'s half interest in Comedy Central to Viacom Inc. will bring in another $1.23 billion.

AOL Time Warner entertainment and networks group chairman Jeff Bewkes disclosed that the company is exploring the sale of the music division's manufacturing arm, which could bring in $1 billion.

"This is a business we would clearly consider exiting at the right price," he said.

The cable IPO was supposed to put AOL over the hump, raising $2 billion. Parsons said the offering will move ahead as planned, but hinted it might not take place this year.

"It's [the IPO] moving ahead, it's moving ahead nicely. But we, like everybody else, have to start thinking about alternative ways to get home in case one road is blocked or one line is down," Parsons said.

"We've got lots of ways we can go to meet our balance sheet objectives and we're very confident we can get there."

Parsons blamed the IPO delay on several factors — the longer-than-expected closing of the TWE restructuring, assembling a board of directors for the cable unit and the Securities & Exchange Commission's investigations into AOL.

SEC impact

Parsons confirmed what several analysts had feared about those investigations: that the SEC likely would not sign off on the IPO if questions remained.

"It is possible that the two extremes [the SEC investigation and the IPO] could cross, so to speak," Parsons said. "We have not gotten to that bridge yet, let alone figured out how to cross it."

Despite the lingering questions at the online unit, AOL Time Warner reported a surprisingly strong first quarter.

Revenue rose 6%, to $10 billion. Cash flow rose 14%, to $2 billion, led by the filmed entertainment, networks and cable divisions.

At Time Warner Cable, revenue rose 9% to $1.8 billion, and cash flow rose 6% to $691 million.

The cable unit added 23,000 basic subscribers, finishing the quarter with 10.8 million customers.