Don't expect a lot of cheering when America Online Inc. (NYSE: AOL) reports its fourth quarter results after market close. AOL, which is one of the few Internet companies actually called "mature," is facing the laws of large numbers when it comes to upside surprises.
The company will top estimates, but there won't be any moonshots.
Because of AOL's predictable financials, sheer girth and concerns about everything from subscriber growth to the free PC movement, analysts are almost subdued about AOL's earnings, which are expected to come in at 11 cents a share. Merrill Lynch analyst Henry Blodget has his earnings estimates below consensus at 10 cents a share but hedges with "$0.12-$0.13 is possible."
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Investors have little patience for Internet companies that don't crush Wall Street estimates. See the reaction to Excite@Home Inc.'s (Nasdaq: ATHM) earnings later today and the weakness following Yahoo! Inc.'s (Nasdaq: YHOO) stellar results. And since AOL isn't likely to crush estimates things could get choppy for the stock in the short-term.
How important is beating estimates by a significant amount? Is a smaller than expected loss by 10 cents a share worth more than gobs of profit? Investors should put AOL's earnings in perspective. If AOL hits consensus estimates, earnings will be up 100 percent from a year ago. Analysts are banking on revenue of about $1.3 billion, up roughly 40 percent .
PaineWebber analyst James Preissler puts it this way when it comes to beating estimates. "For every penny of upside, the company would have to produce $12 million of extra net income, clearly quite a significant amount in order to move the needle in a meaningful way," he said.
Translation: Don't expect much in the upside surprise department.
If AOL creams estimates it may be because it tweaked its expenses to impress the Street. "We do not believe the company will aim to blow away expectations going forward," said Preissler. "Instead, we believe AOL will continue to demonstrate what we would classify as the 'brute strength' in the model - finding a balance that can satisfy both near-term investors' expectations, as well as provide enough long-term re-investment to continue to grow the business."
Here are the metrics worth watching when AOL reports earnings:
Subscriber additions: Blodget is looking for 775,000 net new subscribers (excluding Compuserve). That sum would fall within the company's original guidance range of 750,000 - 850,000.
Preissler is more bullish. "We believe net new registrations could be up 800,000 in the quarter, in-line with our original expectations, up 19 percent from FQ4 1998's 670,000 net new registrations," he said. "We have modeled AOL to have over 17.6 million subscribers by the end of the FY 1999."
Preissler's estimate is based on AOL's domestic growth. "Domestically, we believe, AOL is tracking ahead of expectations with about 650,000-700,000 net adds, which we believe is a very strong sign, because it shows that AOL is still adding subscribers at an above average rate," he said.
International growth: Preissler is bullish on domestic growth, but expects international additions to be a drag. AOL's problems in Europe and the free Internet service model are well documented. In Europe, AOL's growth rate has been slower than expected because of metered local calling. ISPs have been able to give away free Internet connections, because in many countries local calls get billed by duration, unlike the U.S. where local calls get billed at a flat rate, said analysts.
AOL is working on free Net service in Europe with a Netscape Online.
Advertising and commerce revenue:
Last quarter, AOL's stand-alone advertising and commerce revenue increased 25 percent sequentially to $157 million as the company grabbed some share from Yahoo!. Before the last quarter, Yahoo grew faster than AOL in the ad revenue department for the last six quarters. Blodget's estimate for "advertising, commerce and other" revenue is $290 million.
"An especially strong number in June would allow the company to continue to argue that its bundled services are more valuable to advertisers than Yahoo!'s content-only web properties," said Blodget. Yahoo has already reported sequential ad revenue gains of 24 percent.
Other wild cards will include discussion on Excite@Home's plan to subsidize AOL users to switch to its broadband services. On a conference call with analysts, Excite@Home president George Bell said the early results indicate 60 percent of AOL users that try Excite@Home and cable access don't go back. Bell's argument is this: Loyalty to AOL isn't that strong and as they say in the sports world, there is no substitute for speed. Of course, AOL is rolling out digital subscriber line service to challenge cable.
The cable vs. digital subscriber line access continues....