If you followed Jeff's opening argument, you witnessed some crafty dodging. He rightfully tagged EBITDA as a "piddly, scrawny joke compared to the importance of free cash flow." Then, conceding that the stock "ain't cheap on a price-to-free cash flow basis," he went on to rest his entire valuation case on EBITDA.
How piddly of my otherwise worthy colleague.
I guess it's time to let you know why we're down to analyzing AOL in terms of this "scrawny joke" of a metric. Now that America Online and Time Warner are one, the company has a ton of balance sheet baggage. The company is carrying $126.6 billion in goodwill. This is, for the most part, what America Online paid in excess of Time Warner's net assets. The company is also lugging around another $48.6 million in intangibles. With assets like these, who needs liabilities?
The accounting implications are real. AOL is forced to write these sums off in manageable chunks. So, sandbagging profits is this $1.8 billion quarterly write-off in amortization and depreciation. While this is not a cash expense, it is a reportable one. In short, it shackles the company to reporting earnings in terms of EBITDA.
However, what is a real, out-of-pocket quarterly expense is the interest payments the company now has to make on its greater-than-$20 billion debt load. Once relatively free of long-term debt scars, the company paid out $352 million to service its bloated leverage last quarter. If you add up the company's interest expense, depreciation, and amortization -- the I, D, and A that EBITDA wants you to ignore -- it's a sum greater than the quarterly revenues at its America Online subsidiary. Ouch!
But even with asterisks, the company is failing. Jeff might be one of the few remaining believers who think that the company is going to hit its initial targets of $40 billion in revenues and $11 billion in EBITDA this year. Jeff, you don't have to stay on the Titanic if you don't want to.
The water is cold, dude. And you're just staring at the tip of the iceberg. Last I checked, moxie can't be used as a flotation device.
Yes, that same moxie the company is showing by paying up for desktop space come October. But are you forgetting why AOL now has to pay the tolls on the information superhighway? It's because Windows XP has its own version of AOL's killer app -- Instant Messaging -- which is set to become next year's version of the Netscape browser. Oops, another AOL investment gone bad.
So where does that leave you? You can keep kissing the WB frog. It won't amount to royalty. But if you follow the frog onto the lily pad, beware the depths of the pond. You're not amphibious. You don't want to be around AOL Time Warner when it becomes AOL Warner. You know, when it runs out of Time.
Rick Aristotle Munarriz is still online right now. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.
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