AOL edges 1Q forecasts

Updated 6:40 p.m. ET

America Online (NYSE: AOL) earned a penny more than consensus estimates in the first quarter and insisted its advertising business remains as healthy as ever.

After market close Wednesday, the world's biggest Internet service provider reported fiscal first quarter net income of $350 million, or 14 cents per share, not including special charges. First Call's survey of 33 analysts predicted a profit of 13 cents per share for the quarter ended Sept. 30.

Shares of AOL rose to 49 in afterhours activity on the Island electronic communications network, following the release of quarterly results. AOL stock rose 3.31 during Wednesday's regular trading to close at 46.91 ahead of the first quarter report.

Including non-recurring items, AOL earned $345 million, or 13 cents per share.

First quarter revenue incresaed 34 percent year-over-year to $2 billion from $1.5 billion. Operating margin was 25 percent, compared to 18 percent a year earlier.

Advertising, commerce and other revenue totaled $649 million, an 80 percent gain from the year-ago period, and roughly in line with analysts' expectations. Advertising and commerce backlog at the end of the quarter was $3 billion, or about the same as the fourth quarter.

About 33 percent of AOL's revenue now comes from advertising and commerce, compared to 24 percent a year ago, CFO Mike Kelly said during a conference call with analysts. Kelly said he was "very confident" about the quality of AOL's advertising backlog.

During the conference call, executives from AOL repeatedly pointed to the company's advertising and commerce as a position of strength, despite doubts about the overall market for online ads.

"For this company, I don't see (advertising weakness) and I don't buy it," said Bob Pittman, president and chief operating officer of AOL. "Business looks great to us."

Subscription revenue of $1.2 billion represented a 21 percent improvement from the year-ago period. AOL's flagship service picked up 1.4 million subscribers during the quarter, and ended September with 24.6 million users. The Compuserve brands had more than 2.8 million members at the close of the quarter.

AOL Europe added 290,000 users during the first quarter and now has 3.9 million members total.

Also Wednesday, AOL said it would launch the next version of its AOL client software by the end of October.

Wednesday's report comes as AOL speaks with government regulators regarding an AOL-Time Warner merger. "The AOL-Time Warner merger is on track to close this fall, just as we predicted," CEO Steve Case told analysts. "We're highly confident of a successful conclusion."

On Wednesday, Time Warner (NYSE: TWX) reported net income of $85 million, or 6 cents per share, on revenue of $6.9 billion. First Call's analyst survey predicted a profit of 4 cents per share.

For the first nine months of this year, AOL and Time Warner saw combined revenue of $23.6 billion, up 12 percent year-over-year. Executives reiterated previous stated expectations for AOL Time Warner, including 40 percent growth in annual revenue and a 25 percent improvement in cash earnings per share.

"We feel terrific about the way the new company's coming together and we're convinced we can meet the financial targets we have set," Case said.

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