AOLTW reports Q2 profit despite AOL drag –

AOL Time Warner Inc. (AOLTW) reported a profit for its second-quarter results Wednesday, as the company's film and cable businesses made up for a continued weakness in the America Online (AOL) Internet unit.

However, although the results beat forecasts, the Internet and media giant dampened expectations for its third quarter, saying it expected the crippled online advertising market to continue to take its toll on revenues.

What's more, AOLTW Chief Executive Officer Richard Parsons confirmed during a conference call Wednesday that the U.S. Securities and Exchange Commission (SEC) is conducting a fact-finding inquiry into the way in which the AOL unit has booked past revenue. News of the SEC probe comes just days after media reports were released saying that AOLTW had performed a series of unusual transactions to prop up AOL's revenues.

Parsons took pains during the call to assure investors that the company's financial reporting adheres to all applicable SEC and regulatory guidelines.

Net income for the second quarter of 2002 was US$394 million, or $0.09 a share, compared to a net loss of $734 million, or $0.17 a share in the same quarter of 2001.

Revenue for the quarter, which ended June 30, came in at US$10.6 billion, a 10 percent increase over the $9.6 billion the company reported for the second quarter of last year.

Earnings before interest, taxes, depreciation and amortization (EBITDA) were $2.5 billion, up two percent from $2.4 billion in the second quarter of last year, with cash earnings per share of $0.24, exceeding consensus expectations of $0.22 per share from analysts surveyed by Thomson Financial/First Call.

The stronger-than-expected results were led by solid performances in the company's film and cable businesses, which experienced revenue increases of 26 percent and 18 percent, respectively, over the same period last year.

However, these were offset by AOL's weak results. The Internet unit reported a 3 percent decline in revenue and a 25 percent drop in its EBITDA for the quarter.

Although AOL continued to rack up subscriptions, adding 492,000 new members during the quarter, the weak online advertising market stymied revenue growth, AOLTW said. AOL now claims 35.1 million members. Although some analysts have questioned the membership figures, noting that many members are on free trial subscriptions, AOLTW Chief Financial Officer Wayne Pace defended this practice Wednesday.

"AOL's habit of offering free trial periods is a very inexpensive way for us to convert users (into paying subscribers)," Pace said.

The company said it expected the online advertising market to remain weak into the third quarter, stunting AOL's growth. However, AOLTW expects its full-year revenue to stay on track, growing by between 5 percent and 8 percent, thanks again to its strong film and cable units.

The on-target results come after a tumultuous week for AOLTW, which saw an executive shakeup and a realignment of the company's business structure.

The company announced last Thursday that AOLTW Chief Operating Officer and interim AOL head Robert Pittman was resigning. The company's troubled Internet division will now fall under the control of veteran Time Warner executive Don Logan. Logan's ascension, along with that of fellow Time Warner holdover Jeff Bewkes, which was also announced last week, are being seen as a power shift in the old media company's favor.

Bewkes, who was formally chairman and CEO of HBO, will take charge of the company's new Entertainment & Networks Group.

Investors have watched AOL struggle in recent months to sustain growth, while reports last week that AOLTW engaged in unusual transactions to boost the unit's revenues rang investor alarms. The Washington Post reported Thursday of last week that the company had shifted revenue from one division to another to prop up AOL's earnings, amid other alleged financial shenanigans. Although AOLTW has said that all the transactions in question were perfectly legal, a cloud of doubt still plagues the company. Its stock price, which has already declined 60 percent so far this year, has taken a further hit in recent days.

This comes as bad news for new AOLTW Chief Executive Officer (CEO) Richard Parsons, who took the helm in May pledging to regain investor confidence by cleaning up the AOL division and ensuring financial transparency.

Parsons said Wednesday he was "comfortable" with the company's financial reporting.

"I want to assure you that our outside auditor, Ernst and Young, has reviewed the transactions and have affirmed in writing that they were appropriate and in accordance with GAAP [Generally Accepted Accounting Principles]," Parsons said.

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