Revenues rise for AOL

Fueled by e-commerce and ad growth, the online giant beats analysts' expectations but delays reporting its net income.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
4 min read
Fueled by a rise in advertising and e-commerce revenues, in addition to stronger-than-expected membership growth, America Online today soundly beat analysts' fourth-quarter earnings estimates.

The online giant said it also is on track to meet Wall Street's expectations of a profit of 91 cents a share for fiscal 1999--a figure that translates into 80 percent earnings growth over the fiscal year just ended.

However, AOL said it expects to report its net profits, including some additional charges, at a later date. The company is in the process of finalizing those results but said the operating results announced today will not change.

The company ended the year with 12.5 million subscribers, a 45.3 percent increase over the previous year. Chief executive Steve Case said he's comfortable with Wall Street's estimates, based on the company's membership growth.

"I was surprised by the strength of the member growth this quarter," he said during a conference call. "When we announced the [monthly unlimited access rate] increase, my prediction was that we would see no member growth in the June quarter as we transitioned to the new pricing plan. The fact that we had our best fourth quarter ever, despite the price increase and lower marketing expenditures, was a surprise and a delight to me...and we expect that to continue."

AOL also saw its backlog of advertising and e-commerce contract revenues rise, to $510.5 million at the end of fiscal 1998 compared with $180 million at the close of the previous fiscal year.

The online giant, which last April increased its monthly membership billing rates by $2 per subscriber, reported operating profits of $57.3 million, or 23 cents a share, before special charges for the quarter. That compared net earnings of $5.6 million, or 3 cents, a year ago.

Analysts had expected the company to report earnings of 19 cents a share, according to First Call.

Case said lower marketing expenses, as well as revenue growth, pushed the company's operating profits ahead. AOL's marketing expenses stood at 12 percent of revenues for the quarter, compared with 21 percent a year ago.

The company, which is looking to expand its offerings, has been under increasing pressure by competitors challenging its Internet portal business. The company runs what amounts to two services: its proprietary dial-up network for paid subscribers and AOL.com, the service's portal to the Net.

Just about every other portal entrant, which includes heavy hitters like Yahoo and Netscape Communications' Netcenter, have been gunning for AOL, in hopes of creating services that lure millions of users.

Despite the competition, AOL's revenues jumped to $792.3 million for the quarter, up 67 percent from a year ago.

The rate increase resulted in a push for subscriber revenues, to $667.5 million for the quarter, up 73 percent over a year ago and up nearly 16 percent over the previous quarter. The company said the results reflect "higher membership and higher revenues per member." AOL averages $18.68 in revenues per subscriber, up from $17.65 in the previous quarter. AOL averages $18.68 in revenues per subscriber, up from $17.65 during the previous quarter.

The company's advertising, e-commerce, and other revenues rose to $124.8 million for the quarter, up 5.8 percent from the previous three-month period.

Scott Appleby, an analyst with ABN AMRO, said the slight one-digit increase was the result of several large deals occurring toward the end of the third quarter. He said he expects to see larger sequential growth during the next two quarters.

"I expect to see huge sequential increases in the future," he said. "I think we'll see a $13 million increase in the first quarter and a $21 million sequential increase in the second."

For the most recent quarter, AOL's ad and commerce fees generated $83.1 million, an 87 percent increase over the same period during the previous year.

Revenues rose to $2.6 billion for the fiscal year, up 54 percent over the previous year, while operating income reached $134 million, or 55 cents a share, compared with a net loss of $13.4 million, or 7 cents a share, reported a year earlier.

Last month, Ameritrade signed a deal to pay $25 million to AOL to be displayed on its finance site for two years. That deal followed three in June, in which brokers DLJ Direct, Waterhouse Securities and E*Trade each paid $25 million to land a similar deal.

These are the kinds of deals that AOL is hoping to keep it on the upswing when it comes to outside revenues. But some have questioned AOL's ability to keep the millions in marketing money rolling in on a consistent basis. However, if AOL can maintain its market leadership, it should be able to continue attracting big money from companies willing to pay to gain access to the millions of eyeballs likely to see ads.

Analysts have cautioned that AOL must be careful not to alienate its users with too many ads. The company used to release figures on how many people left and how many joined--known in the industry as the "churn rate"--but stopped doing so about two years ago.

AOL has also faced criticism over its privacy policies, most recently when a customer service representative gave information to a naval investigator that was used to order the discharge of a sailor. (See related story) Since then AOL has said that it has redoubled its customer service training.

News.com's Janet Kornblum contributed to this report.