On Wednesday, shares of AOL Time Warner experienced a significant 10% decline, pulling down other entertainment stocks with them. This downturn was fueled by underwhelming revenue reports and uncertainties surrounding the advertising sector and the broader economy.
The company's financial performance was marred by slower-than-expected ad sales and a soft music industry. Despite reporting $9.2 billion in revenue, which surpassed the previous year's $8.9 billion, it fell short of Wall Street's expectations. CFO Mike Kelly indicated that hitting the ambitious $40 billion annual revenue target now appears to be at the upper end of possibility, suggesting the goal may not be met.
Adding to the grim outlook, Federal Reserve Chairman Alan Greenspan delivered a pessimistic economic forecast. Meanwhile, CEO Gerald Levin is reportedly contemplating a major expansion, including a potential deal for AT&T Broadband, following Comcast’s rejected bid. Analysts warn that such a move could further depress the already struggling stock price, which closed at $44.50, down $4.95.
In the music division, revenue dropped 11% to $895 million, and cash flow plummeted 33% to $87 million. Richard Parsons, COO responsible for content, attributed this to an industry-wide slowdown and a weak release schedule. However, he noted that Warner Music had gained domestic market share, rising to just over 17% from about 15.5%. Upcoming releases and cost-cutting measures are expected to bolster future performance.
Parsons also highlighted the success of "Cats & Dogs," a film promoted heavily on AOL, which he believes could become the largest family-oriented movie in Warner Bros. history. The studio is likely to increase its promotional efforts through in-house channels, making the company less dependent on external advertisers.
In the filmed entertainment segment, total revenue increased 5% to nearly $1.9 billion, with cash flow growing to $250 million, up from $213 million. DVD sales were a key driver, with 26 million units sold, a 65% increase from the previous year.
Networks, including CNN, HBO, TBS, and Cartoon Network, saw flat revenue growth, but cash flow rose 18% to $444 million. Levin emphasized the ongoing restructuring of CNN, with Walter Isaacson recently appointed to lead the news group.
Cable revenue surged 14% to $1.7 billion, with cross-platform advertising and e-commerce contributing to a 19% increase in ad revenue. Cash flow rose 13% to $777 million, as the company expanded its digital cable and high-speed internet offerings.
Publishing, however, saw a 1% decline in revenue to $1.2 billion, primarily due to weaker ad sales in auto, financial services, technology, and tobacco. Despite this, cash flow grew 21% to $271 million, thanks to cost savings and streamlining.
America Online (AOL) reported a 13% increase in revenue to $2.1 billion, with advertising and e-commerce revenue up 26% and subscription revenue up 8%. Cash flow rose 37% to $801 million, following a $1.95 monthly price hike in July. Levin and COO Bob Pittman are exploring additional local advertising opportunities to boost revenue.
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