AOL posts profit, reports charge

America Online posts a fourth-quarter operating profit, excluding a charge that was shifted from an earlier quarter.

4 min read
America Online (AOL) today reported a fourth-quarter operating profit but also posted a $24.5 million charge that it had incurred earlier in the year.

Separately, the online service revised its third-quarter earnings report after discussions with the Securities and Exchange Commission, which had questioned the company's accounting practices. Although AOL was not accused of violating any laws, investors and analysts have raised concerns about the company's accounting in the past.

For the fourth quarter, AOL recorded an operating profit of $10.9 million, AOL at a glance or 9 cents a share. Wall Street had expected the company to post a profit of 7 cents a share, according to First Call.

That figure, however, did not take into account the charge from the second quarter, which had been based on earlier estimates based on the termination of contracts. Once the precise cost of those terminated agreements was known, AOL then decided to post the resulting revised charge in the fourth quarter.

When that charge is factored into the final fourth-quarter numbers, the nation's largest online company actually recorded a net loss of $11.8 million, or 12 cents a share, for the period ending June 30, compared with profits of $16 million, or 14 cents a share, a year ago. The revision shrank the second-quarter loss to $129.1 million from $154.8 million.

Analysts had predicted this quarter would be free of one-time charges and other things that would cloud a picture of AOL's performance, but such was obviously not the case.

Revenues for the fourth quarter rose to $475.7 million, up from $334.5 million a year ago.

After its talks with SEC regulators, AOL restated its third-quarter profit of $2.6 million as a loss of $4.7 million. It had booked $12 million in revenues from a long distance provider contract, rather than spreading out those revenues over the length of the 40-month agreement.

Such "aggressive" accounting practices are not new to the giant online service provider. After numerous complaints from investors and Wall Street about the way the company expensed the cost of securing new members, AOL in the first quarter switched to a more conservative accounting practice and bit the bullet for its earlier practice by taking a $385 million charge. The company started to account for the expenses in the quarter they occurred, rather than spread them out over a period of time.

Len Leader, AOL's chief finanical officer, defended his company's practice against critics who may suggest the company is trying to cook the books, something that has been hinted in the past.

"We believe our accounting is accordance with (General Accounting Practices) and I would underscore [that the rules] are very general and open for interpretation. Going forward, I cannot guarantee that the SEC will not challenge other accounting positions," he said.

Leader noted that AOL will try to work more closely with the SEC on accounting practices, "but there is no real precedent, so we will work closely with advisors and take the best accounting position."

AOL chairman and chief executive Steve Case stressed during a conference call that analysts look beyond the revised figures.

"If you look beyond the adjustments, you'll see a company making advancements on many fronts. We've held the line on costs, specifically on marketing, while achieving steady membership growth and building up on non-service revenues."

Bob Pittman, president and chief executive of AOL Networks, said the company's continued growth in revenue is the result of a brand with worldly recognition.

"We are feeling the power of a mass-market brand, and we are letting it drive the brand. We've adjusted the strategy and are building consumer awareness, and that is much more efficient than just sending out disks," he said.

While AOL has also taken steps to build up its network to alleviate connectivity problems and scale back on new customer sign-ups, it still holds the worst access record among top Internet service providers.

Still, analysts, too, are cautiously optimistic about the company's future growth.

"They have built an empire of 8.5 million subscribers and strong brand recognition, and now they can scale back," said Abhisek Gami, an analyst with Nesbitt Burns. "They are growing slower for now, and marketing costs have also dropped."

AOL's troubles in servicing its existing customers led to an agreement in the past year to limit its membership at 8 million until it had the equipment and infrastructure to support additional growth. The result: The company spent less on marketing last quarter and AOL posted a slight profit that surprised Wall Street.

Gami noted that AOL must maintain controllable growth to prevent future hiccups.

Meanwhile, the company's brand recognition is likely to attract a wave of advertising revenue from corporate America as more non-technology companies flirt with online promotion.

And AOL recently introduced its expanded business model, designed to attract new revenue streams by going beyond its monthly flat-rate pricing. For example, last month, AOL revised its merchant revenue model. That model charges businesses rent for storefronts on its private online service, generating up-front fees and, in some cases, collecting commissions on merchant sales.

"AOL has done everything right this year, especially in growing non-subscriber revenues," Gami said.