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AOL outdoes earnings expectations

With net profits of $117 million, the company nearly doubles its earnings for the third quarter, beating analysts' forecasts.

Fueled by strong revenue growth, America Online today said it nearly doubled its earnings for the third quarter and beat analysts' expectations.

America Online reported net profits of $117 million, or 11 cents per share, for the quarter ended March 31, excluding one-time events, compared with $39 million, or 4 cents per share, a year ago.

Analysts had expected the online giant to post earnings of 9 cents per share, according to First Call. But whisper numbers by Wall Street had figures as high as 11 cents.

Including charges and one-time gains, the company posted consolidated net earnings of $420 million, or 33 cents per share. This quarter marks the first one in which AOL's newly acquired Netscape Communications was folded into its financial operations. The figures compare with AOL's third-quarter loss of $78 million, or 8 cents per share, a year ago.

Meanwhile, revenues jumped to $1.25 billion in the quarter, up 66 percent from a year ago. AOL also beat analysts' revenue projections of roughly $1 billion.

Driving that growth was a 94 percent increase in advertising and commerce revenues to $275 million from $142 million in the like quarter a year ago.

"The majority of AOL's profits are derived from its advertising and commerce revenue, so strong sequential growth in this line is critical to the long-term growth story," Henry Blodget, an analyst with Merrill Lynch, wrote in a research note.

He also noted that AOL lost some of its market share for advertising and e-commerce to competitor Yahoo last quarter.

AOL recently noted that its subscriber base had grown by 1.8 million new members in the quarter, giving the company a total of 16.9 million members. Analysts had expected AOL to report about 1.7 million new members.

During a conference call following the earnings report, AOL executives further touted new areas of growth for the company, most notably the strategy of making AOL available on a number of devices. AOL president Robert Pittman said the company was "examining platforms, researching products, and waiting for the right opportunity."

AOL chief executive Steve Case added: "We want to make AOL readily available to as many people as possible. As we look at this new world, we want to support all major devices that might find [their] way into the homes of many different people."

Analysts cheer quarter
Analysts in general were pleased by AOL's quarter, citing in particular its growth in subscriber numbers and advertising/e-commerce revenue.

"I think they just continued to amaze and impress," said Daniel King, an equity analyst at LaSalle Street Securities, a Chicago-based brokerage firm. "They really seem to be hitting their numbers on a wide range of issues."

In terms of AOL's integration of Netscape, analysts are still waiting in the wings to see the full effects of the merger. Since Netscape became an AOL division in March, the companies have cleaned house considerably. Last month, the companies laid off 850 employees following a restructuring of management and departmental responsibility that created a bicoastal AOL.

But for the past quarter, it was too early to measure how well the companies are handling the restructuring.

"We're looking at this as a snapshot of having control of the company for the past two weeks," King said. "We haven't seen the effects of layoffs, any other cost-cutting measures that they may be planning for Netscape, or other operating efficiencies of the combined enterprise."

Today's earnings come amid reports that AOL is in talks with Comcast to outdo AT&T's $54 billion bid for MediaOne, the nation's fourth-largest cable provider, according to the Wall Street Journal. Comcast also is reportedly talking with Microsoft about a similar arrangement.

The possible move reflects AOL's heightened efforts to secure a foothold in cable modem Internet access services. Cable modems allow consumers to access the Internet at a speed significantly faster than the speeds possible with conventional dial-up modems. AOL also has taken other steps toward providing broadband access in the digital subscriber line (DSL) space.

In March, AOL inked an greement to provide DSL service in SBC Communications' sectors. This comes after AOL signed a similar deal with Bell Atlantic in January.

"Whether it's a partnership, an investment in, or some other type of transaction with a cable, DSL, or some other kind of operator, they're certainly looking to do that," said equity analyst David Levy of ING Baring Furman Selz.

Levy added that if the deal becomes more than speculation, it would not only give AOL the presence it needs in the cable network, but perhaps open cable lines to other ISPs as well.

"The issue is, does that facilitate or hasten the cable plans for other providers?" he said.