When AOL Time Warner installed Bob Pittman as CEO of America Online earlier this month, investors feared business at the Internet unit was worse than expected. On last week's first-quarter earnings conference call, executives lowered the company's earnings guidance for the year, acknowledging just how bad the online advertising slump was at the AOL unit.

Regaining momentum in AOL's online advertising ? a low-cost, high-margin business for the company, which is why it has such a disproportionate effect on the company's earnings ? will be no small challenge for the company, but it's just one of many.

The Wall Street Journal reported Friday that several top executives are talking about the possibility of selling to the public a small stake in Time Warner Cable. If the company undertakes such a move, it would solve two problems at once: It would give the company the cash it needs to buy out AT&T's stake in a partnership (with TWE, Time Warner Entertainment, a subsidiary of AOL TW) that controls many of the company's assets, and it would give Time Warner Cable its own currency with which to participate in consolidation in the cable industry at a time when the corporate parent has somewhat limited financial flexibility.

A spokesman for the company declined to comment.

Meanwhile, the company is still wrangling with Advance/Newhouse over the future of a partnership that holds some 1.7 million cable subscribers. On the call CEO-elect Richard Parsons reassured investors that AOL TW is not considering buying out the Advance/Newhouse stake, nor is Advance/Newhouse considering selling it. But it is possible Advance/Newhouse could take the subscribers under its own management, which would be a big blow to Time Warner Cable's earnings.

In a research note, Merrill Lynch analyst Jessica Reif Cohen said, ?should AOL lose cable systems as a result of the TWE/AN restructuring, or be unable to participate in industry consolidation due to the lack of financial flexibility, it would further slow the deployment of AOL Broadband, a key driver of the company's long-term growth.?

Further, the company ended the quarter with about $27.6 billion in debt, and Parsons has pledged to retain the company's triple B-plus credit rating, which could limit its financial options when it comes to making acquisitions in the cable space.

Shares of AOL, which rose in after-hours trading after the company reported, have continued to slide and hit a new low Friday of $18.72, down 77 cents, or 4%.

?To buy the stock right now you have to make a leap of faith,? said Scott Kessler, an Internet services analyst at Standard & Poor's, adding that he doesn't see the catalyst that would make people think the worst is over.

Presently AOL TW is juggling a lot of balls, so it ?may be well advised to block and tackle for a while,? and take care of the issues like the Newhouse partnership before it enters into a huge transaction like an IPO of the cable unit, said David Smith, an analyst at RBC Capital Markets.

AOL TW's first-quarter earnings report had a few bright spots, including solid growth at the cable unit and a reversal of declines in the music and publishing units.

A previously announced write-down of $54 billion, reflecting the decline in value of the company's assets since the merger, led to a net loss of $54.2 billion, or $12.25 a share. Excluding the write-down the company reported earnings of 18 cents a share, up from 16 cents a year earlier. Total revenue increased 4%, to $9.76 billion. Earnings before interest, taxes, depreciation and amortization (EBITDA) rose 3%, to $2.05 billion.

Time Warner Cable helped drive those results, with 19% revenue growth, to $2 billion, and EBITDA growth of 10%, to $841 million. A 28% increase in TWC's programming costs largely due to sports cost increases, affiliate fees and channel launches was offset by continued growth in new service revenue.

Although the company affirmed its full-year forecast for revenue growth of 5% to 8%, continuing weakness at America Online led AOL TW to cut its forecast for 2002 EBITDA to 5% to 9%, from 8% to 12%. America Online posted a 31% decline in advertising and commerce revenue. Total America Online EBITDA fell 15%, to $433 million.

Pittman noted on the call that getting AOL ?back on track? will be his top priority and that he expects the unit to be in growth mode in the second half of this year and then to regain momentum in 2003. But some analysts appeared skeptical and questioned why he was so confident in a recovery by next year.

?This is obviously an area where [the company] hasn't demonstrated it can get its arms around,? said Standard & Poor's Scott Kessler.

Another looming challenge for the Internet unit is cutting deals with major cable MSOs for the deployment of AOL Broadband, which to date has been deployed only on Time Warner Cable systems.

Back to this issue