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AOL beats earnings estimates

The company reports earnings that beat Wall Street estimates after a quarter marked by strong subscriber growth and robust revenue.

America Online today reported earnings that beat Wall Street estimates after a quarter marked by strong subscriber growth and robust revenue.

The online giant earned $184 million in net income, or 15 cents per diluted share, compared with a profit of $50 million, or 4 cents a share, in the year-earlier period. Financial analysts expected the company to earn 13 cents a share, according to First Call consensus estimates.

AOL added 1.1 million new subscribers worldwide during the quarter, as well as 378,000 new CompuServe subscribers. That gives AOL 18.7 million proprietary members and 2.2 million CompuServe members worldwide.

Total revenue reached $1.5 billion for the quarter, swelling 47 percent since the same period last year. Of the total, $350 million came from advertising, commerce, and "other" revenue.

AOL also reported that members spend an average of 55 minutes online every day.

Analysts were impressed by the figures, noting that the quarter underscored AOL's dominance as well as its ability to attract more advertisers for revenue.

"AOL subscribers already spend more time on AOL's site, engage on a greater amount of e-commerce transactions, and build loyalty unlike any other ISP [Internet service provider]," said Jordan Rohan, an analyst at Wit Capital. "This enables the company to produce a larger advertising and commerce revenue stream per subscriber than any other ISP."

Rohan added that AOL's launch of AOL 5.0, its latest software upgrade, will keep users on its service for longer periods of time. AOL 5 launched earlier this month with new features, including You've Got Pictures--an online photo service created with Kodak--and My Calendar, created through AOL's acquisition of When.com.

"Users are spending more time on site, and it's manifesting itself in advertising and commerce revenue," Rohan added.

One dark spot in an otherwise gleaming quarter came from Netscape's enterprise software business. Revenue declined from the previous quarter, slipping from $128 million to $122 million this quarter.

Jim Preissler, an analyst at PaineWebber, said enterprise revenue declined because the division, which is closely associated with Sun Microsystems, is still waiting to ship its new software products next year.

"[The division is] integrating Sun's product set with Netscape's product set, and that's what's happening now," Preissler said. "There's not a lot of growth in business while it's happening."

All access all the time Aside from the record earnings report, AOL's quarter was marked by a sluggish stock performance and increased speculation about whether it could sustain its lead among ISPs.

The main sensitive spot for AOL has been the emergence of free access at home and abroad. With the growth of subscription-free, ad-driven ISPs such as NetZero in the United States and Freeserve in the United Kingdom, investors and analysts have questioned whether these services would nibble away at AOL's marketshare.

The markets in the United States and the United Kingdom are different. The free ISP model has been successful for Freeserve because the company can make money from phone charges instead of subscription fees. Local phone calls in the United Kingdom are metered, while in the United States they are not.

Because free ISPs in the United Kingdom get a cut of the phone charges, the free ISP model became a business that AOL wanted to tap. In mid-July, AOL launched Netscape Online to take on Freeserve.

But the situation is different in the United States, according to AOL. Although NetZero's free ISP had signed 1.68 million users as of August since launching a year ago, questions remain whether the ad-supported model works.

AOL was also under the heat lamp when it was reported that MSN was considering launching a free ISP service. Microsoft instead announced last month that it would raise prices for its ISP service to $21.95 a month. Nonetheless, investors showed signs of skittishness after a short seller commented that AOL would have to cut its subscription rates to remain competitive.

AOL is resolute in its stance regarding free access. During a conference call with financial analysts, AOL chief executive Steve Case gave a flat-out "no" when asked whether AOL would launch a free ISP in the United States.

"We just don't see it being a viable business model," Case said.

Other access-related issues circulated last quarter when rumors surfaced about a possible deal with telecom giant AT&T. Speculation involved whether AOL would acquire the Excite Web portal as the ticket to gain access to AT&T's cable broadband network. Although AOL remains mum about the deal, AT&T issued a release acknowledging it has been in talks to explore "possibilities" with third parties regarding Excite@Home.

Most observers no longer question whether AOL and AT&T will do a deal; they're only asking when and in what form it will come. One scenario that won't likely materialize is a deal involving Excite@Home, something Case alluded to in the conference call today.

"Our interest is to work with companies that own the broadband infrastructure," Case said during the conference call. "I don't know why there's a benefit working with an intermediary."