How Sharp Is Pittman's Ax?
By David Shook
Wall Street has learned at least one thing about Bob Pittman, the chief operating officer of AOL Time Warner: When Pittman says he'll deliver, he does. Small wonder, then, that the 88,000 employees of AOL Time Warner (AOL ), the world's largest media company, are walking on eggshells these days.
Never mind that the economy is swooning and the markets are in bear territory. Pittman has promised sales of $40 billion this year -- a 12% increase over 2000 -- and $11 billion in earnings before subtracting interest, taxes, depreciation, and amortization. That would be a 30% earnings increase over last year, making AOL one of few media giants that still thinks it can meet expectations in 2001. But such optimism hasn't made AOL's stock immune from the downturn. It has fallen to $35 a share from a high of $69 last May.
So how's Pittman going to make good on his promises? AOL's subscription revenue is still expected to carry the company's growth this year, most analysts believe. But a crucial factor in achieving Pittman's financial goals, many are now starting to believe, may be heavier-than-expected job and spending cuts across all divisions. AOL announced 2,400 layoffs -- a 3% workforce reduction -- after the merger in January. But outsiders say those numbers might not be high enough should the grim ad market gets worse.
Bad news for some AOL workers, yes. But the scenario is also making AOL's stock the analysts' choice right now, with some calling it the most underpriced in the media sector.
"I wouldn't bet against Pittman," says Gartner Group analyst David Smith. "He'll look at any way possible to achieve the necessary cost savings if that's his goal." Adds Jefferies & Co. media analyst Fred Moran: "I think management is dead set on making or getting as close to $11 billion in cash flow, but without doing any damage to the sustainable growth rate of the business."
He has made AOL his top pick this year. He likes the company because it derives only one-quarter of its sales from advertising, where Viacom and other media giants generate close to 75% from the ad market. "If we head into a recession, the downside risk is much lower with AOL," Moran points out.
With regard to job losses, AOL is sticking with the script -- 2,000 layoffs companywide, plus 400 additional cuts at CNN. "Right now, 2,400 is the number. That's pretty much it. That's what we've said we need," says AOL spokeswoman Trisha Primrose. But employees believe the company is quietly looking past those numbers. "The layoffs are happening everywhere," observes a five-year employee at Time Inc., the magazine division.
A SLIMMER CNNfn.
Already, job and spending cuts are in full swing, aimed from the lowest levels at CNN to the executive suites at Time Warner, where former bosses have been pushed aside by AOL executives. For instance, Richard Bressler, a Time Warner finance and digital media executive, left recently to become Viacom's chief financial officer. And Turner Broadcasting System President Steve Heyer left in March for another big Atlanta company, Coca-Cola. His exit followed TBS Chief Executive Officer Terry McGuirk's decision to step down into a semi-retirement position with the company.
The division suffering the most casualties may be CNNfn, which is consistently whipped in the ratings by larger rival CNBC. Dozens of production staff and managers have been let go. The plan is to recast it as a slimmer, more-focused business channel renamed CNN Money. This would leverage the brand of Time Inc.'s monthly personal-finance magazine and give the channel better recognition in its fight with CNBC, a source at Money says.
But it's not just managers and executives feeling the pinch. Lower-level employees in Time Warner's digital media and information technology divisions have found their jobs to be redundant as AOL moves to take over all Internet operations. Web sites throughout Time Warner have been scaled back to much smaller staffs, employees say. In Style magazine, for instance, has quietly scrapped plans to sell fashion merchandise online, leading to job losses at a Web site that last year aimed to be a combination online magazine and e-commerce portal for women's fashion.
People, Money, and Fortune are cutting back as well -- and not just at the lower rungs. One Disney Internet Group employee recently applied for a job at People.com in New York and interviewed with two different managers. "I learned recently that they've both been let go," he says. "The interviewing scenario there has been freakish."
Then there's the Mar. 22 Fortune memo that top editors John Huey and Richard Kirkland e-mailed to employees asking for "volunteers" to be laid off in return for severance. "To put it in plainspeak, we now have more folks on some parts of the staff than we need," they wrote to magazine staff. "While the details vary with each individual, you should know that job-elimination severance is more generous than performance management or cause severance," the memo warned.
Beyond the job cuts, changes in Time Warner's spendthrift culture are evident as well. AOL has been cutting back on staff expense accounts at Time Warner, which always had a reputation for allowing employees to build relationships with clients or sources via lavish spending on lunches, dinners, and travel. Now, employees are having to justify such expenses more than last year, sources say.
"AOL's culture has already taken effect here," says one Time Inc. insider. "AOL laughs when we say, 'Come up to New York, and we'll have a long lunch.' We view it as building relationships and trust. They see it as a waste of time and money."
While the happy days may be over at Time Warner, all this trimming and downsizing makes Wall Street smile. Pittman built his reputation as the guy who comes through with the goods, no matter what. His 2001 financial goals are greater than last year's -- and meeting them will be tough, given that 2000 was a banner year for media companies and ad sales.
Investors also know AOL has a history of acquiring companies and then taking the liberty to drastically scale back the workforce. Remember the $4.2 billion Netscape merger two years ago? When it was all over, AOL laid off 30% of Netscape's 2,500 employees, according to most reports.
As Time Warner employees fret over job cuts, one has to consider a mitigating factor -- the company's reliance on subscriptions, which account for about 42% of revenues, rather than ad sales, which account for 24%. Rivals don't have the premium -- and highly profitable -- subscriber services that AOL Time Warner holds in HBO, magazines, or 21 million Time Warner Cable subscribers. More important, competitors don't have America Online and its 28 million subscribers. These revenue streams amount to a huge advantage over Disney, Viacom, and Fox -- whose fortunes are more closely tied to the cyclical ad market.
Another factor may be a price increase from America Online, which is now considered highly likely this year. Internet access will soon rise to $23.95 a month from $21.95, analysts say. It could add as much as $500 million in cash flow, Moran says, boosting AOL's chances of meeting its yearend revenue target. But even with a rate hike and strong subscription-based businsesses, Pittman's goals are still highly ambitious.
AOL's stock-price decline shows that investors cleary don't think Pittman can achieve his financial goals given what he has already put on the table. But the COO knows that reaching them could secure his destiny as the next leader of the company -- eventually replacing CEO Gerald Levin. Since Pittman has a track record of setting financial goals and hitting them at AOL, there's little reason to doubt he'll succeed this time.
Has the swoon hit AOL's stock too hard? That's something that will be weighing on the minds of AOL Time Warner employees and execs alike in the next few months -- and something smart investors will want to ponder.
Shook covers financial markets for BusinessWeek Online in New York
Edited by Douglas Harbrecht