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AOL Finally Backs off Bullish Forecast

9/30/2001 8:00 PM Eastern

After months of insisting its operations would meet the ambitious growth targets it first announced in January, AOL Time Warner Inc. finally succumbed last week when it told investors it would not meet year-end growth estimates in light of a bleak advertising market made worse by the Sept. 11 terrorist attacks in New York and Washington.

AOL joined Viacom Inc, which said on Sept. 19 it would not meet third-quarter expectations because of sluggish advertising revenues and increased costs from around-the-clock news coverage of the disaster on its broadcast and cable networks.

Last Monday, AOL said its full-year cash flow growth would be in the 20 percent range and revenue would grow between 5 percent and 7 percent. AOL had forecast of 30-percent cashflow and 10-percent revenue gains.

AOL Time Warner executives were careful to put the earnings revision in perspective, in light of the events of the past two weeks.

"No financial impact can compare to the terrible suffering and loss of life inflicted by the vicious attacks of Sept. 11," AOL Time Warner CEO Gerald Levin said in a prepared statement. "The AOL Time Warner family is fully committed to continuing to do everything in our power to assist those who have been affected."

When AOL Time Warner was formed last January, top executives repeatedly stressed that it would make its projected numbers — cash flow of $11 billion (a 30 percent gain from 2000) and revenue of $40 billion (a 10 percent gain) — despite Wall Street's skepticism that it would be able to meet those goals in a down advertising market.

But AOL Time Warner kept harping on its unique position in the industry: It claims that its roughly 133 million "subscriptions" for such products as America Online, Time Warner Cable, Home Box Office and various magazines would act as a cushion against lower advertising sales.

Now those projections have been trimmed to $10.1 billion in cash flow and $38.1 billion to $38.7 billion in revenue.

"They had stuck with the old numbers far too long," said Sanford Bernstein & Co. Inc. media analyst Tom Wolzien. "Overall, it's tough for everybody."

Most analysts had hoped for signs of a recovery in the ad market later this year, with a full rebound in the first half of 2002. But with the uncertainty surrounding the U.S. response to the terrorist attacks — and growing doubts about consumer confidence — some analysts are unsure when the recovery will come.

"You needed to get some pickup [in the ad market] this year to get to where anybody had their advertising numbers for this year [prior to the attacks]," Wolzien said. "Now, it doesn't look like it's getting any worse, but it certainly doesn't look like it's getting any better."

Although the advertising environment was already in decline, AOL Time Warner said, the Sept. 11 attacks made a bad situation worse. The company also said it would incur additional expenses at its newsgathering operations, including Cable News Network, the Time Inc. magazines, AOL and regional cable news channel New York 1.

The company also said it expects 2002 cash-flow growth to hit the double-digit range on the strength of its content and subscription businesses, which make up more than 75 percent of total revenue.

"The events of Sept. 11 tested our country and it's tremendously reassuring to see how well Americans have come together, reaffirming our commitment to freedom and democracy," AOL Time Warner chairman Steve Case said in a prepared statement. "The tragedy also created new challenges for all of us, and at AOL Time Warner we will redouble our efforts to connect, inform, and, whenever possible, serve the public interest."

UBS Warburg LLC media analyst Christopher Dixon lowered his 2001 and 2002 earnings and cash-flow estimates for the company, but maintained a "strong buy" stock rating.

"We continue to view AOL as 'best of breed' in the media sector, as advertising comprises only 25 percent of AOL's revenue and we believe subscription revenues and cash flow at AOL, Time Warner Cable and HBO can provide some margin support," Dixon wrote in his report.

Although Dixon dropped his 2001 and 2002 cash earnings-per-share estimates for the company to $1.20 and $1.45, respectively (they had been at $1.32 and $1.73) — and lowered his 12-month price target on the stock from $54 per share to $48 per share — he added that "AOL can weather the storm as well as any company in the media sector."

AOL Time Warner stock took a hit after the announcement was made following the market's close last Monday. It dropped as low as $30.10 in after-hours trading.

The stock recovered on Tuesday to close at $32.80 per share but was down another 55 cents each on Wednesday, closing at $32.25 each.

September