AOL tumbles after record loss

Decline in value of AOL causes $98.7B loss for 2002; difficult "reset" year in 2003; Turner leaving.

By Chris Isidore, Senior Writer
CNN/Money

January 30, 2003

NEW YORK (CNN/Money) - AOL Time Warner Inc. stock tumbled 14 percent Thursday after the world's biggest media company posted the biggest loss in history for a U.S. company and forecast for no growth in operating profits in 2003

New York-based AOL also announced that Ted Turner, its largest individual shareholder, is giving up his vice chairman position in May, and a source close to Turner told CNN/Money he may leave the board of directors altogether.

Such a departure could free the outspoken Turner to be an even more active critic of the board or to sell more of his 4 percent stake in the company. Either move could further depress the already battered stock. Turner said he was giving up the vice chairman post to concentrate on his charitable activities.

AOL Time Warner sank about 14 percent, meaning the shares have lost about three-quarters of their value since the now widely criticized merger of AOL and Time Warner was completed two years ago.

AOL Time Warner's loss came to $44.9 billion, or $10.04 per share, in the fourth quarter and a corporate record $98.7 billion, or $22.15 a share, for the full year. While the company had signaled it would see another charge in the quarter, the announced charge was more than twice as large as expected.

The charge also spread beyond the shrinking value of its America Online unit to two other divisions -- cable television and music.

The latest charge follows a $54.2 billion charge earlier in the year due primarily to the decline at AOL. The two charges do not represent an outflow of cash from the company, and fourth-quarter income excluding special items actually came in a bit better than expected. But, perhaps more serious than the charge and the record loss, the company suggested that 2003 will be another challenging year.

CEO Richard Parsons said that beyond well-known problems at its America Online unit, the company's successful movie and television studios would have trouble meeting the successful results of 2002, despite a strong lineup of movies due this year. He also said its music division would also see a decline due to problems in that industry.

Parsons said that 2003 would be a "reset" year for the company, and that its key measure of profitability, earnings before interest, taxes, depreciation and amortization (EBITDA), would be essentially flat for the year and down slightly in the first quarter.

Analysts surveyed by First Call are looking for the company to earn 13 cents a share in the first quarter, down from 18 cents a share a year earlier, and 83 cents a share for the full year, down from the 88 cents a share it earned before special items in the same period the year before. But First Call said 15 of the 18 analysts who follow the company had cut their 2003 estimates by 9:30 a.m. ET Thursday.

The company also said that its revenue for the year should be up in the mid-single-digit percentage range, which is roughly in line with forecasts by analysts who see revenue rising to $43.1 billion, about 5 percent better than the $41.1 billion in revenue posted in 2002.

The 2002 loss is a staggering number certain to draw more attention to the company's problems. It is roughly half the size of the projected 2003 U.S. federal budget deficit and more than 10 times the total operating loss for the entire U.S. airline industry, which was battered by the Sept. 11, 2001, terrorist attack.

It is also roughly equal to the price that America Online paid for Time Warner Inc. in the merger that created the company two years ago.

The two charges have implications for the company's future financial position, according to Chuck Hill, director of research for earnings tracker First Call.

"The charge signifies that AOL used its highly inflated stock to purchase hard assets," said Hill. He said while the loss was due to accounting practices, not a flow of cash away from the company, it could become a problem because banks require the company to have a certain net worth in order to comply with loan agreements.

"It puts you in a precarious spot where you have to worry about further losses pushing you into a situation where you wouldn't meet the debt covenants," said Hill.

But AOL Time Warner Chief Financial Officer Wayne Pace said the company still has shareholder equity of $52.8 billion, just above the $50 billion level required by the banks. And he said those loan provisions are being renegotiated and the decline in value should not cause a liquidity problem for the company going forward.

The company was able to reduce its long-term debt level to $27.4 billion from $28.2 billion at the end of the third quarter, although that number is well above the $22.8 billion debt level of a year earlier.

The company's ability to cut its debt has concerned credit rating agency Standard & Poor's, which said Thursday it may lower AOL Time Warner's debt ratings.

Parsons and Pace promised the company would take steps to reduce net debt from about $25.8 billion at the end of 2002 to below $20 billion by the end of 2004. They said they want net debt to be between 2.25 and 2.75 times EBITDA at the end of 2003, which comes to between $20.4 billion and $24.8 billion, based on the EBITDA target.

Parsons said he hoped to accomplish much of the debt reduction through the company's profits, but said asset sales are likely to be a part of the equation as well.

"The bottom line is we think we have a lot of ways to get home," Parsons said. "We'll explore and exploit the ones that stand out to be the most beneficial to the company."

Parsons confirmed reports that the company sold its stake in satellite television operator Hughes Electronics for about $800 million Tuesday as part of its effort to cut debt. That sale of the 8 percent stake in the unit of General Motors Corp. came at a loss.

Despite the hit to earnings, the company posted fourth-quarter earnings of 28 cents a share excluding special items, slightly better than analysts' consensus forecasts of 26 cents a share. The company also earned 26 cents a share on that basis in the year-earlier quarter.

While EBITDA fell 11 percent at the troubled America Online unit, it rose at all the company's other divisions, with 13 percent gains at both its studios and cable operations, a 46 percent rise at its networks, a 25 percent rise for its music division and a 21 percent gain at publishing.

"We are glad to see solid operational performance, even though a much larger-than-expected goodwill write-down was taken for the AOL and cable divisions, about $45 billion in total," David Joyce, analyst at Guzman & Co., said in a note to clients.

Companywide revenue rose to $11.4 billion from $10.6 billion, as strong box office and DVD sales and improving ad revenue from old- line media such as television and magazines overcame declining revenue at AOL. The revenue beat First Call's forecast of $11.2 billion.

America Online saw a continued decline in revenue due mostly to long-term weakness in advertising and commerce. The service also saw a 176,000 decline in the quarter in the number of AOL subscribers in the United States, leaving the service with 26.5 million U.S. customers; it was the first quarterly decline the unit has ever had.

As to the charges, the New York-based company took a total write-off of $45.5 billion, more than twice what some industry analysts had expected, to reflect the loss of value at its various business units in the quarter. The America Online unit took the brunt of the charge, at about $33.5 billion, but the cable operations caused $10.5 billion of the total while the music segment booked $1.5 billion.

The charges are based on assessments of the units' value, considering their current operations and market values. The reduced value in the cable operations was a surprise and not good news for a company that is planning an initial public offering of a minority stake in the unit sometime later this year as one of its moves to reduce debt.

AOL Time Warner, which owns Time magazine, the Warner Bros. movie studio, CNN, CNN/Money and other properties in addition to the AOL online service, had taken a $54.2 billion charge earlier in the year, mostly to reflect the impairment to goodwill on its balance sheet.

Meanwhile, Turner, the founder of CNN and the company's largest individual shareholder, is stepping down as vice chairman of AOL Time Warner, effective in May.

In handing in his notice, Turner, 64, said he wants to spend more time to pursue the charity and "socially responsible business efforts" he has become involved with in recent years. In 1997, Turner pledged $1 billion to a foundation to support the United Nations. He is an outspoken environmentalist and the largest private landowner in the United States.

"I have not come to this decision lightly," Turner wrote to CEO Parsons. "I have the deepest respect for you, the senior management and my fellow members of the board. With this team in place, I am optimistic that the company will be able to move forward and reach its true potential."

Turner is a former winner of the America's Cup yachting title, and was the 1991 Time Man of the Year. He was one of the pioneers of cable television, making WTBS in Atlanta into one of the nation's first "superstations" that could be viewed on cable systems around the nation, as well as starting cable networks from CNN to the Cartoon Network.

But in 1996 he sold his Turner Broadcasting company to Time Warner Inc., a move that started his decline in control over the businesses. He feuded with then Time Warner Inc. CEO Gerald Levin, who announced early retirement from the company last year.

Turner's announcement follows a series of shake-ups at AOL Time Warner. AOL Chairman Steve Case announced earlier this month that he will resign that post in May. Turner also has been critical of Case.

Turner's personal fortune has fallen significantly since the merger. The most recent proxy puts his holdings at 148.2 million shares, worth about $2 billion at current prices, but down from about $8 billion at the time of the merger.

The board voted earlier this month to give the chairman post to Parsons in addition to his CEO position. It is not clear if Turner wanted or expected to be offered the chairman position at that time. He reportedly told CBS' "60 Minutes II," in an interview set to air next week, that the vice chairman position is largely ceremonial, "like the Emperor of Japan."

Parsons praised Turner Wednesday and said he looked forward to his continued advice. AOL Time Warner spokeswoman Tricia Primrose said Parsons expects Turner will remain on the board and that the two would discuss the matter soon.

Case has announced plans to run for re-election as a director. A source close to Turner told CNN/Money that he has yet to make a decision on whether to seek to stay on the board and that decision would be made as the May meeting of shareholders gets closer.

© 2003 Cable News Network