A new accounting rule is helping AOL Time Warner pad its books, but it won't help the media company achieve its optimistic revenue goals for 2001.
The rule, which went into effect July 1, allows public companies to avoid amortizing some costs associated with acquisitions. The rule affects all public companies, but it will help AOL Time Warner more than most by adding $5.9 billion, or $1.28 a share, to its annual net income. Under previous accounting rules, the company would have had to write down the $5.9 billion each year and would have listed the cost as a charge related to AOL's acquisition of Time Warner.
"This is a way of creating transparency for investors," said Sheryl Thompson, spokeswoman for the Financial Accounting Standards Board.
Analysts were quick to point out that while the boost looks good on the books, it represents noncash assets, which won't help AOL Time Warner reach its aggressive revenue target of $40 billion in 2001. The company has said it expects to post $11 billion in profits for the year.
"This doesn't mean the company is performing any better," said John Corcoran, media analyst at CIBC World Markets. "AOL Time Warner's primary goals are revenue and cash-flow goals."
In a separate development, CSFB analyst Jamie Kiggen reduced his earnings estimates for the company for the second half of 2001, but he said that the stock, which dropped to $38.05 a share on Tuesday, "should be nearing a bottom."
Kiggen reduced AOL Time Warner's expected second-half revenue by $300 million. He expects 2001 revenue to reach $39 billion. Kiggen also reduced AOL's expected earnings before interest, taxes, depreciation and amortization (EBITDA) by 2.8 percent, to $10.6 billion from $10.9 billion. EBITDA is a widely used measure of cash flow.
Investors were apparently unimpressed with the development, sending AOL Time Warner shares up just 5 cents, or 0.13 percent, to $39.70 on Wednesday.
