Old Media Sales Boost AOL-TW’s Profit

Revenue gains among AOL Time Warner’s old media assets helped the company reach profitability during the second quarter, while offsetting continued weakness in its flagship ISP America Online.

Advertising and comerce revenues at AOL fell by 42 percent during the period and the outlook for the rest of the year remained soft for the unit. Analysts also noted their concern over the sluggish gains in AOL subscribers during the quarter.

The sales growth among its cable, film and music divisions also could be seen as justifying a management shakeup that put Time Warner executives in new top jobs. Last week, Chief Operating Officer and AOL interim Chairman Robert Pittman resigned. His duties are being split among two Time Warner executives, Don Logan, chairman of Time Inc., and Jeffrey Bewkes, chairman of HBO.

Separately, AOL Time Warner CEO Richard Parsons announced that the Securities and Exchange Commission had begun looking into the company’s accounting practices after a published report raised questions about how it booked some ad deals between 2000 and 2002.

In a two-part story, The Washington Post raised questions about how the media giant accounted for advertising revenues as the dot-com collapse was spreading.

The report referenced hundreds of pages of confidential AOL documents in its probe of whether AOL boosted revenue using a series of unconventional deals from 2000 to 2002.

Parsons disclosed the SEC probe during a discussion of the company’s results. Net income was $394 million (9 cents per common share) on revenues of $10.6 billion for the quarter, up 10 percent over revenues from the same, year-ago period.

Last year at the same time, the company posted a net loss of $734 million, or 17 cents per common share (which included goodwill and intangible amortization charges of about $1.7 billion) on revenues of $9.6 billion.

All divisions posted increased sales except for America Online, whose revenues were down by 3 percent to $2.3 billion. Advertising and commerce revenues decreased by 42 percent in the quarter to $412 million, largely due to the soft online advertising market.

Content and other revenues were down 45 percent in the quarter to $68 million, primarily as a result of the termination of its iPlanet agreement with Sun Microsystems. That took over $40 million from the unit’s cash earnings, which fell by 27 percent to $473 million.

“The online ad market has not improved over the past few months,” said Richard Parsons, AOL Time Warner’s CEO. “My sense is the third quarter will be comparable in absolute dollars to the second quarter.”

However, America Online’s 20 percent boost in subscription revenue more than offset its declines in advertising, commerce and content revenues. The company said membership grew despite the usually slow summer period, with an additional boost coming from price increases in the U.S. and Europe.

During a conference call discussing the outlook for the America Online unit’s revenue, Parsons stuck with prior expectations at the low end of $1.8 billion to $2.2 billion, about the same for the second quarter.

After praising Pittman’s contributions to the company, Parsons said the appointments of Don Logan and Jeff Bewkes to chair the company’s two new operating groups “represent a significant step forward in enabling our divisions to excel individually and together.”

Under the new structure, Logan is to become chairman of the newly created media & communications group, which includes the AOL unit, Time Inc., Time Warner Cable, AOL Time Warner Book Group and its Interactive Video unit.

Bewkes is to head up the company’s new entertainment & networks group, which includes HBO, New Line Cinema, The WB, Turner Networks, Warner Bros. and Warner Music. Both report directly to Parsons.

The company is making progress on its key, near-term priorities, Parsons continued, “including securing the new, long-term $10 billion credit facilities to extend our financial flexibility at attractive rates, as well as restructuring our cable partnership with Advance/Newhouse. We will move forward as rapidly as possible with the revitalization of America Online, with particular focus on improving the AOL service and rebuilding its advertising business.”

Parsons defended the company’s accounting practices in response to the Washington Post article. Company officials have defended the accounting for all of the transactions mentioned in the story as appropriate and in accordance with generally accepted accounting principles (GAAP). Its auditors, Earnst & Young, also checked the accounting and signed off on it, the company said.

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