INTERNET Analysts keep an eye on AOL turnaround plan

Analysts want to see if AOL can switch its customers to broadband plans.
LOS ANGELES TIMES
Wall Street, never long on patience, will be poring over AOL Time Warner Inc.'s second-quarter earnings today with an eye on the handiwork of Jonathan Miller.
A year ago, the 46-year-old was brought on board as chief executive of the media giant's limping AOL division. A few months later, Miller announced a turnaround plan -- and skittish investors are looking for signs that AOL is attracting, not losing, subscribers.
"If we don't see a significant pickup in the next six months, the pressure is really going to mount," said Matt Davis, broadband director of Yankee Group. Davis is one of many analysts eager to know whether AOL has begun to lure fleeing dial-up customers to its new broadband services before rivals can grab them.
Over the next four years, AOL could lose more than 10 million of its 26 million dial-up subscribers, and that probably will be only modestly offset by gains in broadband customers, according to a research report last week by Merrill Lynch analyst Jessica Reif Cohen.
Nevertheless, Cohen upgraded AOL Time Warner stock to a "buy" from "neutral," predicting that declines in earnings growth at the Internet unit won't be as much of a drag on the parent company as she previously estimated. Based on the trading of other entertainment companies, Cohen set a target price for AOL Time Warner of $24 a share.
AOL Time Warner shares have been trading under $17 a share.
Miller's past
Miller, who came to AOL Time Warner from USA Interactive, now known as InterActiveCorp, has been afforded something of a grace period to gather an executive team and ramp up marketing. He also bought time by impressing Wall Street with his ability to squeeze expenses at the Dulles, Va.-based division, which accounts for about $9 billion, or 22 percent, of the conglomerate's roughly $41 billion in annual revenue.
By trimming jobs in addition to marketing, customer service and network costs, Miller pleasantly surprised Wall Street earlier this year by reporting a stronger cash flow in the first-quarter than most analysts were expecting. And he has promised to do more cutting, if necessary.
"As long as he continues to show good cost control and the margins hang in there, people will give him the benefit of the doubt," said Michael Gallant, analyst at CIBC World Markets.
Gallant reckons that 500,000 to 600,000 dial-up customers will drop out in the second quarter. That would be the first year-to-year decline in AOL subscribers. The analyst also anticipates the unit will show a 15 percent decline in earnings before interest, taxes, depreciation and amortization, a widely watched measure of company performance.
Still, Gallant said he is willing to reserve judgment on Miller's success or failure for at least another few months. "The September quarter will be the real benchmark," he said.