HITS Daily Double
"We are beginning to reap the benefits of the structural changes we have all worked so hard to implement over the past two years."
——WMG chief
Roger Ames


WMG a Bright Spot Amid $54 Billion Writeoff
Even as AOL Time Warner took a one-time charge of $54 billion, leading to a jaw-dropping $12.25 per-share loss, Warner Music Group, which has struggled mightily for years to regain its footing, reported a cash-flow increase for Q1 2002.

WMG’s EBITDA increased 2% over Q1 2001 to $96 million on a revenue increase of 5% to $947 million. The company attributed the increases to improved label performance worldwide, but noted that the gains were offset by unfavorable currency exchange rates.

In a memo to his staff, WMG chief Roger Ames said, "We are beginning to reap the benefits of the structural changes we have all worked so hard to implement over the past two years," noting that WMG marketshare has grown to 18% from 15.7% last year.

"All of this has been accomplished in what has been one of the toughest environments the music industry has ever faced," Ames said.

Speaking of tough environments, the AOLTW picture as a whole wasn’t so rosy.

FAS 142, that nifty new Financial Accounting Standard which requires companies to write off goodwill—essentially the difference between what a company paid for an asset and what it’s worth now—all at once, rather than amortize it over a number of years, has triggered what’s being called the biggest corporate writeoff ever: $54 billion.

Thanks to that mega-whopper of a charge, which was expected and is related to America Online’s purchase of Time Warner for some $106 billion in 2000, AOLTW today reported a first-quarter net loss of $54.2 billion, or $12.25 per basic common share.

That’s gotta hurt.

But at least it’s over, and, as the company’s earnings report takes pains to point out, it’s a one-time, non-cash hit. Absent that hit, overall results for the quarter would have been less horrific: A net loss of $1 million, or break-even per share, compared to Q1 2001’s net loss of $1.4 billion, or $0.31 per share.

Most of AOLTW’s operating units, music among them, posted EBITDA increases, with two exceptions: America Online itself and the AOLTW’s networks, which include HBO, Cinemax, CNN, TNT, Turner Classic Movies, TBS and the Cartoon Network.

Networks EBITDA dipped 4% to $431 million on a 5% revenue gain, which the company attributes to "reduced high-margin advertising revenue and increased programming, marketing and newsgathering costs."

But the real sore spot is AOL, whose EBITDA dropped 15% to $433 million on basically flat revenue. Advertising and commerce revenue declined an astounding 31% for the quarter, pushing EBITDA down with it. Along with advertising, the termination of AOL’s lucrative agreement with iPlanet was cited as a contributing factor to the earnings decrease.

Cable, Filmed Entertainment and Publishing all reported EBITDA increases for the quarter. Due primarily to the continuing ad crunch, however, AOLTW revised its forecast for full-year revenue growth downward to 5%-8% from 8%-12%.

In a Monday afternoon analyst call, AOLTW CEO-elect Dick Parsons and AOL chief Bob Pittman promised to address the AOL problem and said they would provide more information about their plans to get the company back on track in the near future. The pair also expressed hope that the second half of the year will look better than the first as advertising markets rebound.

Referring to the dramatic tumble of AOLTW’s share price and the accompanying media hailstorm, Parsons said, "The swirl in my mind is out of line with reality. I remain very upbeat about the future of this business."