AOL Time Warner on Wednesday reported third-quarter revenue of $9.3bn, beating Wall Street's estimates, but only after having reduced expectations caused by the slowing economy. But more troubling for the media giant, analysts have begun raising flags over the future financial health of its AOL unit, pegged as the company's cash cow. The division was hit hard this quarter by the downturn in advertising, a trend that is unlikely to improve in the near future. In response, Merrill Lynch analyst Henry Blodget downgraded AOL Time Warner to "neutral" from "buy." "While reported revenue and EBITDA were in line, we are concerned with underlying trends at AOL," Blodget wrote in a note to investors this morning. "We believe this sudden drop may be the result of the rolling off of long-term contracts priced at the height of the online advertising market," he said. "As a result, we are not optimistic about a near-term recovery in AOL's (advertising and commerce) revenue." For the quarter, AOL Time Warner posted $2.5bn in earnings before interest, taxes, depreciation and amortization (EBITDA), up from $2.1bn in the same period last year. Including one-time charges, the company's net loss grew to $996m from $902m last year. The charges stemmed from $134m in merger-related expenses and a $196m noncash write-down from its investments. Excluding certain charges, the media giant reported earnings of 30 cents a share. Analysts had expected AOL Time Warner to post a profit of 26 cents a share, according to First Call. The report, a barometer on the condition of the media industry, was not surprising. The company last month warned that it would not reach its aggressive year-end financial goals of $40bn in revenue and $11bn in EBIDTA, which measures cash flow. AOL Time Warner blamed the declining advertising market and the events surrounding the 11 September terrorist attacks for the shortfall. In the aftermath of the attacks, a wave of analysts concerned about advertising growth cut revenue estimates for the quarter to $9.15bn, according to First Call. "I give them an A for effort and a B+ for execution," said Jordan Rohan, an equity analyst at SoundView Technology Group. "The cable networks unit showed very good cost discipline, but it looks to me that the AOL unit could lag for the next few quarters." Advertising and commerce contracts are rolling over or having to be renegotiated, Rohan said. "Clearly, that revenue stream will be more difficult to generate in the future." Indeed, the company reported a 5 percent drop in advertising and commerce revenue, compared with the year-ago quarter, to $1.9bn. One bright spot in the company's report was its subscription business, long touted by executives as a stabilising force in a rocky economy. Subscriptions rose 13 percent to $4.2bn, bolstered by membership growth in the America Online unit, Time Warner Cable's digital service and the Road Runner broadband Internet service provider. See techTrader for the latest financial news in the high-tech sector. Have your say instantly, and see what others have said. Click on the TalkBack button and go to the techTrader forum Let the editors know what you think in the Mailroom. And read other letters.