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Tech Industry

Wall Street still leery of AOL

More modems to pacify users and new deals to bring transactions revenues haven't yet earned AOL a place in stock portfolios.

America Online (AOL) today put on the ol' dog and pony show at an investors conference, but Wall Street is holding its applause.

"I don't have any AOL in my portfolio and probably won't buy any based on what I heard today. I'll take a look at their numbers after the quarter and track them to see if they're on plan," said Frank Korth, portfolio manager for Zurich Kemper Investments' technology fund.

Korth, who manages the $1.2 billion fund, said AOL has a huge problem and it remains to be seen if they can resolve it.

AOL's woes are no secret. The online service, which boasts 8 million paid subscribers, has been hit with two consecutive multimillion-dollar losses--$154.8 million in the second quarter and $353.7 million in the first--due to one-time charges.

AOL this week was hit with a shareholder lawsuit; this after it recently settled a multistate suit brought by attorneys generals because it offered a flat-rate $19.99 service before it had the necessary equipment to service the surge in demand.

However, as AOL pointed out today, there are positive signs. AOL is capping its number of members at eight million until it expands its network to accommodate them. The company is looking to ramp up to 325,000 modems by the end of April and reach more than 400,000 by late June to cut down on busy signals when members attempt to log on to the service.

And in the meantime, AOL is looking beyond its subscription fees to add to its revenue base. The company is increasingly landing deals from advertisers and expects to capture even more money from its share of merchants' electronic commerce transactions, said Lennert Leader, AOL's chief financial officer.

"Eighty percent of the industry gets its revenue stream from subscriber fees. We have to have a 50-50 split with subscriber fees and transactions by the year 2000," he said.

But Lise Buyer, a technology analyst with T. Rowe Price Associates, is skeptical.

"It's still hard to know how this things will shake out. They've had well-publicized problems with their network and business model," Buyer said. "The question is: How quickly can they stabilize their network [expansion] costs and leverage their eight million paid subscribers?"

That might appease customers and reduce the "churn rate" of customers joining and leaving the service.

Leader said AOL's churn rate was high in January but has improved over the past couple of weeks.

"We saw a huge churn rate in December when we announced our new pricing system, but that will improve as the network is built out," Leader aid.

Buyer, meanwhile, said "AOL is still a leap-of-faith stock. Wall Street has been stunningly patient, given the company's write-offs and charges. It's given them the benefit of the doubt because the potential is huge for this to hit a home run."