Earnings to Tell Tales

As one newly minted media giant, AOL Time Warner, begins the arduous task of integrating its many units, another giant in the cable industry, AT&T, is preparing to dismantle itself.

With the advent of earnings season, industry analysts are eagerly awaiting specifics on how they’re doing.

AT&T, which in October announced a plan to split into four separate companies, kicks off earnings season for the big cable and media conglomerates when it announces fourth quarter and year-end results Jan. 25.

In the weeks following AT&T’s report, AOL Time Warner will hold its first analyst confab as a combined company, and media giants from Viacom to News Corp. will bare their numbers.

The economic slowdown has had a chilling effect on the stock market as well as on advertising spending, two changes that mark a far different environment from a year ago. Analysts also expect companies to address the quickly changing pace of the communications landscape, and they will hone in on strategies that will separate the winners from the losers.

In addition to looking for signs of continued weakness in AT&T’s long-distance and business services units, observers want guidance into the capital structure of the new entities and "any insight into how the different entities will perform," says Gary Jacobi, an analyst at Deutsche Banc Alex. Brown who follows AT&T.

"Basically we’re very worried about whether the long-distance business will continue to suffer and cause ongoing problems," he says.

Other sides of the business — including cable — appear to be solid, he says. Overall, he estimates AT&T generated $65.7 billion in revenue in 2000, with AT&T Broadband generating $11 billion, or about 17%. Analysts polled by First Call/ Thomson Financial estimate AT&T generated a little more than $66 billion in revenue for the year.

From AOL Time Warner, analysts are looking for updated numbers and further information on the cost savings to be wrung from the merger. An expected restructuring of Time Warner’s CNN unit happened last week, with 400 people losing their jobs in coming weeks. Any further layoffs from streamlining at other units will likely result in millions in severance charges.

One of Time Warner’s more difficult operating areas recently has been its music business, says James Goss, an analyst at Barrington Research. That unit "provides a type of content that potentially offers a lot of opportunity, if they can determine how to sell" it, while at the same time protecting copyrights and moving to a digital model, he says, adding, "AOL should help in that respect."

Time Warner, with its big base of cable TV subscribers and subscription cable networks, may suffer less from a downturn in advertising than a company such as Viacom, Goss says.

With its 2000 purchase of CBS, Viacom is a lot more sensitive to an advertising slump — another area sure to be a focus of conference calls.

As far as the stocks go, while near-term catalysts for the big media companies — such as the Super Bowl for Viacom and the opening of Disney’s California Adventure — may serve to bid up share prices, investors may remain nervous, which will contribute to the stocks’ volatility.

Company guidance for what is happening in the current quarter and in future quarters will be crucial, since first-quarter earnings comparisons will be especially difficult.

"For the near term, the worst looks to be over, and we believe long-term investors can build positions at current levels," wrote UBS Warburg analyst Christopher Dixon in a recent research note. "Still, real concern about new media valuations, slowing advertising and potential for mid-year talent strikes will likely extend current unease and continue to roil the group."

In his opinion, those dips will be buying opportunities.