AOL earnings slightly beat expectations

The Internet bellwether posts net income of 14 cents per share, edging expectations by one penny.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
4 min read
Internet giant America Online reported quarterly earnings Wednesday that slightly beat Wall Street expectations and announced the nationwide launch of its interactive television service.

The Internet bellwether, which is in the process of merging with Time Warner, posted net income of $350 million, or 14 cents per share, excluding certain charges. That slightly exceeded Wall Street expectations of 13 cents a share, according to a survey by First Call/Thomson Financial.

In addition, AOL posted revenue of $2 billion for the quarter, compared with $1.5 billion during the same period last year.

"AOL's advertising growth is right on target," AOL chief executive Steve Case said during a conference call after the earnings were released. "Together, AOL and Time Warner will be uniquely positioned. The current advertising environment benefits us because it will drive a flight to quality."

Separately, AOL also announced it will introduce new versions of its services in the coming month, including AOL 6.0, the latest software for accessing its online services.

AOL chief operating officer Bob Pittman also said in a conference call that the company will begin selling its interactive television product, AOLTV, within two weeks. The TV set-top boxes will be available in Circuit City retail stores.

In regular trading, AOL shares gained $3.31, or nearly 8 percent, to close at $46.91. Earlier in the day, the shares dipped to a 52-week low of $37. In after-hours trading, the stock climbed to about $49, according to Island ECN, which tracks late trades on electronic networks.

Among other details in AOL's financial report, the company posted $1.2 billion in subscription revenues, $649 million in advertising and commerce revenues, and a $3 billion backlog. The backlog figure is important because it indicates how much revenue AOL expects to receive in the future. Much of this backlog comes from long-term, multimillion-dollar advertising or commerce deals.

Jordan Rohan, an analyst at Wit SoundView, said AOL met most expectations for the quarter. However, some signs of slowdown may be evident.

The fact that AOL's backlog remained flat from the previous quarter "means renegotiations have taken place with AOL's advertisers, and it further confirms views of the continued weakness of online advertising," he said.

Rohan added that he will pay close attention to the post-earnings conference call with AOL executives to find out if the slowing in deferred revenue slowdown is seasonal or a "macroeconomic" change.

AOL's earnings come as Wall Street begins to look more critically at

America Online
Stock price from October 1999 to present.  

Source: Prophet Finance
whether the slowdown in dot-com advertising will affect Internet heavyweights. Strong advertising revenue has allowed many companies to routinely post double-digit growth, helping keep their stock prices at lofty levels.

But widespread fear about a pullback in dot-com advertising has replaced that optimism and helped pulled the rug out from under the shares of many companies. Investors are looking for signs that Internet companies can supplement the dot-com slowdown with revenues from traditional companies sheltered from the market downturn.

Last week, for example, Web portal Yahoo reported earnings that slightly exceeded expectations. Yahoo's stock, however, took a beating on concerns that advertising slowdown could affect future growth.

Before the stock markets soured in April, Web start-ups flush with venture capital often signed multiyear, multimillion-dollar deals with highly trafficked Internet companies such as AOL and Yahoo. Since money has dried up and anxious investors are closing their wallets, Web start-ups are re-examining those lucrative deals.

The first instance of this occurred in March when health care Web site Drkoop.com revealed it was short on cash, which led AOL and Walt Disney's Go.com to take a stake in the company in exchange for the lost revenue.

Pittman, however, said AOL has been sheltered from the apparent decline in Net advertising. "For this company, I don't see it and I don't buy it," he said during the conference call.

Meanwhile, The Internet company is on track to merge with media giant Time Warner. The proposed merger recently gained European regulatory approval, and the companies are awaiting a green light from U.S. regulators.

Final approval from the Federal Trade Commission and the Federal Communications Commission is expected later this month or in early November. Obtaining the necessary approvals has been more difficult than expected.

Concerned with the massive size and influence of the combination, regulators have taken a close look at the deal and may require concessions before granting approval. Among the issues is whether the merged company will allow competitors to use its cable or instant messaging networks.

Competitors such as Disney have asked for assurances that the combined AOL Time Warner will not discriminate against rival content providers on its cable systems and interactive TV services.