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AOL beats expectations, splits stock

Boosted by strong subscription growth, the online giant reports quarterly earnings that beat Wall Street estimates and announces a stock split.

Boosted by strong subscription growth, America Online today reported fiscal second-quarter 1999 earnings that beat Wall Street estimates.

The online giant reported net income of $88 million, or 17 cents per share, beating the First Call analyst consensus estimate of 14 cents per share. This quarter's income was up 340 percent from the $20 million, or 4 cents-per-share, income from the same period last year.

The company also announced a 2-for-1 split of its common stock.

AOL's total revenues reached $960 million for the quarter, an increase of 62 percent from last year. Out of the total, $181 million came from advertising, e-commerce, and "other" revenues--a gain of 66 percent from the like quarter last year.

AOL membership also showed strong gains, as it signed on 1.6 million new members, giving it a total 15.1 million members as of December 31, 1998. Members spent an average of 48 minutes per day on the service, up from 41 minutes during the same period last year.

"With this quarter's record results, we continued to build excellent momentum throughout our operations and across our brands," AOL chief executive Steve Case said in a statement. "In 1998, the Internet truly came of age and became even more integral to people's everyday lives. As the industry leader, America Online is better positioned than ever to continue delivering strong profit growth on a consistent, predictable basis."

The e-commerce slice
Analysts are placing heavy focus on AOL's performance in holiday e-commerce revenues for the quarter. Given AOL's lead in the Internet space, its performance reflects the state of e-commerce as a whole.

"We think that [the past quarter] represents a blow-out quarter for e-commerce in general," said Deutsche Bank equity analyst Jennifer Klein. "And with AOL as the market share leader, they will experience the bulk of that boom, and so we expect to see extremely strong growth in e-commerce dollars and advertising dollars that were generated through AOL."

As an indication of e-commerce activity on AOL, the company has bragged of its $1.2 billion in holiday sales-representing nearly half of all online spending--for its retail partners.

During an analyst conference call after earnings, AOL President Robert Pittman said that e-commerce on the proprietary site began to show more mainstream appeal. As an example, Pittman said the product category "toys, kids, and babies" topped the list of the most purchased items, followed by "apparel."

"Two years ago it was just computers," he said. "The reality is [AOL members] did indeed move to very mass-market products."

Despite these dizzying figures and the company's emphasis on advertising and e-commerce revenue, the main source of AOL's cash flow remains its subscription fees. Advertising and e-commerce revenues combined for $126 million, or 13 percent of total revenues.

Analysts said this figure still shows that AOL's real advantage is that it has powerful revenue stream that none of its competitors can fall back on.

"They can count on that every month," said Andrea Williams, an analyst at Volpe Brown Whelen. "It adds a lot of predictability to the business."

"It's not a negative sign, if the rest of the business is growing," William Blair analyst Abhishek Gami said regarding the ad-commerce revenue line.

Klein added that e-commerce revenue will only increase. "We're just seeing the tip of the iceberg," she said.

A ground-shaking quarter
Aside from high seasonal activity, AOL last quarter also stirred up the Internet landscape with its proposed acquisition of Netscape Communications. The deal is expected to close this spring.

In addition, AOL unveiled its first broadband service offering when it announced plans to roll out digital subscriber line (DSL) service with Bell Atlantic.

However, despite AOL's efforts to open cable lines for selling cable modem access, @Home's acquisition of Excite may provide a substantive challenge to the online giant's foray into various broadband platforms.

AOL responded to the deal by selling its 9.5 percent stake in Excite, according to a filing released today by the Securities and Exchange Commission. AOL stated it decided to cash out instead of maintaining an investment in the merged company.