Continuing accounting troubles and a steep decline in AOL subscribers overshadowed an otherwise rosy report of AOL Time Warner Inc.'s second-quarter results yesterday.
Shares of the company fell nearly 7 percent yesterday, to $15.71, after a run-up of more than 50 percent over the past 12 months. The reaction underscores the difficult task AOL Time Warner faces in rebuilding the confidence of investors disappointed by the results of AOL's acquisition of Time Warner 2 1/2 years ago.
In one setback, AOL Time Warner said the Securities and Exchange Commission had stepped up its objections to the company's accounting for about $400 million in payments from Bertelsmann AG, the German media company, over the past two years, mainly for online advertising.
AOL Time Warner said the SEC's chief accountant had concluded that the company accounted for the transactions incorrectly, increasing pressure to restate its revenue and profits from the deals.
AOL Time Warner has already lowered its previously reported revenue by $190 million over a period of 21 months beginning in late 2000, and further restatements increase its vulnerability to potentially costly lawsuits from shareholders accusing the company of accounting fraud. AOL Time Warner said it was standing by its accounting for the transactions but acknowledged that additional restatements "may be necessary."
The company also said it was "likely" that the SEC would block any registrations for new stock, including its planned initial public offering for its cable division, until the accounting matter is resolved.
The other setback involved the performance of the AOL Internet service. The company reported a sharp drop in the number of AOL subscribers in the United States, down 1.2 million over the past year and 846,000 compared with those in the second quarter a year earlier. The service had 25.3 million subscribers at the end of last month.
AOL Time Warner said it deliberately shed nearly half of the lost subscribers because they failed to pay or violated the rules. But the others left for cheaper or faster Internet connections. The decline underscored the challenge the company faces in fulfilling the company's pledges to begin growing again next year.
In a conference call with investors, Richard D. Parsons, the company's chairman and chief executive, struck a guarded note in his forecasts of the division's future, noting that the demand was hard to predict. "We have got our fingers crossed, and we are optimistic," he said.
But he described the rest of the company's results as "very solid." Among other factors, its results reflected the success of the movie The Matrix: Reloaded and strong sales of DVDs as well as a brisk rebound in advertising at its Turner television networks, including TNT and TBS.
For the quarter, net income doubled, to $1.1 billion, or 23 cents a share, up from $396 million, or 9 cents a share, in the quarter a year earlier. The increase largely reflected one-time gains from the sale of its half-interest in the cable network Comedy Central for about $1.2 billion and a settlement of a lawsuit against Microsoft Corp. for a payment of about $750 million. AOL Time Warner had earmarked both gains to reduce debt. Revenue rose 6 percent, to $10.8 billion.
Excluding accounting charges, those gains and other one-time adjustments, operating income rose 6 percent, to $2.4 billion, or 12 cents a share. That beat analysts' estimates by 2 cents a share, according to Thomson First Call.
Speaking with investors, Parsons revised the company's forecast for the year, but only slightly. He said the company expected adjusted operating income for the full year to rise by a percentage "in the mid-single digits" from $8.7 billion last year. That is at the high end of its previous forecasts. And Parsons also reaffirmed the company's previous projection that its revenue for the year will also rise "in the mid-single digits" from $41 billion last year.
Parsons reiterated the company's goal of reversing the AOL division's decline and returning it to "double-digit" annual growth next year.
The company said it had reduced net debt to $24.2 billion, putting the company ahead of schedule for lowering it. It also said that it had reduced debt enough that it no longer viewed sale of the cable division as imperative.