AOL reports record growth

Bolstered by record revenue growth, America Online posts first-quarter results that exceed Wall Street's expectations.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
3 min read
Bolstered by record revenue growth and a strong climb in subscriber numbers, America Online today reported first-quarter results that exceeded Wall Street's expectations.

The online giant also announced a 2-for-1 stock split effective November 17, which applies to shareholders of record as of November 3. It is the fifth split since AOL went public in November 1994.

AOL posted a net profit of $68 million, or 26 cents a share, compared with $19.2 million, or 8 cents a share, a year ago.

Analysts were pleased with the results and noted the strength in AOL's overall operations.

"It looks positive," said Andrea Williams, an analyst with Volpe Brown Whelan & Co. "The numbers are slightly better overall than what we expected. What's most impressive about the AOL story is how solid it is on all fronts. There's no individual metric that jumps out."

Analysts were expecting the portal company to report earnings of 23 cents a share, according to First Call. In recent days, however, some analysts had already begun to anticipate higher earnings than expected earlier.

Chief executive Steve Case said in a conference call that "the quarter's strong results reinforce the power of our earnings model and business strategies. The strategy for the AOL service is to continue to offer our members a complete integrated package of interactive services from access to content to functionality and member support."

Separately, Case said AOL will announce tomorrow new e-commerce deals just in time for the holiday shopping season. West Coast retailer Macy's, Gap Inc.'s Baby Gap and Toys 'R' Us will offer their wares online as part of AOL's holiday shopping channel.

Revenues rose to $858.1 million for the quarter, up by 65 percent from a year ago. Online service subscriptions helped stoked the fire with a 65 percent increase in revenues to $714.7 million in the quarter from a year ago.

And e-commerce and advertising revenues, which contributed $102.8 million in the quarter, posted rapid growth of 133 percent in the quarter compared with a year ago.

The online service received 951,000 new members in the quarter, bringing its total membership to 13.5 million as of September 30.

"As powerful as these results are, AOL membership growth perhaps provides the most direct measure of our momentum," said Case.

Case repeated the need for AOL to ensure it will be able to offer broadband service to their customers. "Although our broadband strategy is off to a modest start, we think it will be an important part of our business," Case said. "We want to make sure we can provide it to our customers."

AOL had come under fire when it delayed its full earnings report because of discussions with the Securities and Exchange Commission over one-time charges related to its two acquisitions of Mirabilis and NetChannel.

The robust earnings come after a quarter marked by a number of product launches and personnel changes. Aside from reaching its 13 million-member milestone, AOL launched a marketing campaign to distribute millions of CD-ROMs containing it latest AOL 4.0 software.

In addition, AOL boosted its broadband strategy by hiring Mario Vecchi, cofounder of Time Warner's cable Net access provider, Road Runner.

AOL executives briefly touched on efforts to offer broadband service to customers in today's call. "Although our broadband strategy is off to a modest start, we think it will be an important part of our business," Case said.

He noted that while cable is widely viewed as a viable means for broadband service, digital subscriber line (DSL) service falls in that arena as well. The company is currently undergoing trials for DSL service in a number of cities across the United States, and plans to offer the high-speed service for $49.95 per month.

AOL has been mum about its cable access plans. So far, it has been impeded by regulatory roadblocks as well as the cable industry's reluctance to share its networks with outside Internet access providers, especially the runaway leader.

But some analysts say that AOL's best strategy at this point is to leverage its very marketing strength, and think Vecchi's hiring will provide the impetus for progress.