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Time Warner warned shareholders and investors that its fourth-quarter earnings would be lower than expected as a result of a downturn in its movie and music operations.

Coming on the heels of receiving regulatory approval for its planned merger with AOL (hitsdailydouble.com, 12/14), TW's profit warning Monday (12/18) raised questions about whether the combined AOLTW would meet the growth targets it has outlined for next year. The report sent both companies' stocks plunging, with TW dropping 13% to $63.25, and AOL sinking 14% to $42.24 at Monday's close of trading on the NYSE.

AOL and Time Warner both said they weren't changing their projections for 12% to 15% growth in revenue and 30% growth in earnings before interest, taxes, depreciation and amortization to $11 billion for the combined company in 2001, The Wall Street Journal said.

TW said it was reducing expectations for growth in earnings before interest, taxes, depreciation and amortization to 11% for 2000, down from 12% to 13% previously. As Time Warner had reported growth of 12% in EBITDA for the first nine months of the year, the revision implies the company expects to increase EBITDA only 7% to 8% in the fourth quarter, to $1.5 billion to $1.6 billion, analysts told the Journal.

The company blamed the earnings reduction on the "disappointing box office performance" of its release "Little Nicky," "weaker than anticipated music sales" and "recent softness in cable network advertising revenues in line with prevailing market conditions."

While TW wouldn't elaborate on the profit warning, several analysts said the bulk of the roughly $80 million discrepancy was due to the movie and music units. "Little Nicky," which reportedly cost in the neighborhood of $80 million, may have lost as much as $50 million.