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Technology Stocks : America On-Line: will it survive ...?
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To: steve lipson who wrote (4600)8/27/1997 2:41:00 PM
From: Todd Daniels   of 13594
 
>>limited new variable cost outlays.
>>Gross margins on any/all new revenues should be extremely high

1) AOL leases most of the network equip. P&E grew only $126m Q1-4;
much of that capitalized leases. Lease payments/amort for current
net will continue for years. Then there's maintenance, at 20%/yr.
And of course, the largest expense, telco lines are all ongoing
expense.

2) There's little economy of scale in network per se.(see table)
Each unit of fiber, router, modem, etc. handles finite amount of
traffic. As exceeded, new capacity must be added. Main reason for
AOLnet was to gain control. e.g. Sprint lag building to serve demand.

3) 40% of ad/commerce revenue is direct sale of merchandise by AOL
from AOL Stores. Gross margins there average 20%. So can't apply
fancy 50-70% margins to projections of total a/c growth. AOL won't
disclose costs of a/c revenue. What does it have to hide?

No margin improvement even though since 1989 revenues grew 9375%;
subs 11366%. 60% of COGs is telecom.

89 90 91 92 93 94 95 96 97
SUBS (000's)
75 102 131 182 303 903 3000 6200 8600
yr-yr % 36% 28% 39% 66% 198% 232% 107% 39%

GROSS MGN
35% 52% 52% 55% 54% 40% 42% 41% 38%

REV (mil)
15.2 19.6 21.4 26.6 40.0 115.7 394.3 1093.9 1685.2
yr-yr % 29% 9% 24% 50% 189% 241% 177% 54%
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