America On-Line: will it survive ...? Message Board

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Technology Stocks : America On-Line: will it survive ...?

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To: Todd Daniels who wrote (4737)	9/8/1997 11:05:00 PM
From: Gaffa	of 13594

Here is part of the motley fools' analysis of the afternoon's conference call (of course this is posted without their permission): ... Balance Sheet Impact They received $225 million in cash. They eliminate over $150 million in Visa obligations which will have the effect of increasing the company's borrowing capacity. Cash flow from CompuServe's US online service business is expected to be neutral to positive. They gain CompuServe's US online business balance sheet which is expected to have positive working capital and a large cash balance when the transaction closes. At the same time they eliminate ANS's balance sheet which had negative working capital of $36 million at June 30, 1997. Finally, they get a net reinvestment in a European joint venture with Bertelsmann which will operate CompuServe's European online services business which will be capitalized with $50 million in cash. Income Statement Impact With respect to the income statement, they will realize the gain on the sale of ANS of approximately $360 million on a straight-line basis over 5 years as a reduction of cost of revenues, or almost $20 million per quarter. The gain will be spread as this transaction is analagous to sale-leaseback for accounting purposes. It allows them to effectively lock in now the profits they were working to generate through ANS's commercial network business and eliminate the execution risks at the same time. They also get to lock in now the low cost and increasing operating cost efficiencies they were working to realize as an owner/operator of ANS and also eliminate those execution risks. The favorable network pricing is to be used to offset the cost of increased consumer usage. CompuServe's 2.6 million installed base generated approximately $125 million in revenues in the July 1997 quarter. Finally, they will earn interest income from the greater cash balance. Financial Modeling Guidance During the first couple of years they expect some goodwill amortization related to the purchase of CompuServe's US online business. In terms of financial modeling it is important to understand how they are viewing these benefits. A portion of the cost of revenue reduction resulting from the recognition of the gain on the sale of ANS will be offset by the planned profit contributions from ANS which were already in their business model. They do intend to take advantage of this transaction to make additional investments which strengthen their core AOL Networks and AOL Studios businesses. During the first couple of years, the benefits will be somewhat offset by the amortization of goodwill related to the acquisition of CompuServe's US online services business. So, they are cautioning against raising earnings estimates at this time. As they get near closing this transaction and their plans firm up, they will provide additional guidance with respect to these benefits. Their confidence that they can continue to meet their financial targets improves as a result of these transactions. In addition, the cash they gained from this transaction and increased focus gives them the operating flexibility and resources to invest and expand their core businesses.

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