To all: A closer look at AOL's 10Q for 97 Q4:
I apologize for all the typos missing words (the ones I think about
but don't make it to the keyboard). I type these things in real time
and do not put much effort into cleaning them up.
First a quick look at the Balance Sheet:
AMERICA ONLINE, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
December 31, June 30,
1997 1997
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 581,200 $ 124,340
Short-term investments 236 268
Trade accounts receivable,net 86,718 65,306
Other receivables 31,130 26,093
Prepaid expenses and other current assets 81,150 107,466
Total current assets 717,434 323,473
Property and equipment at cost, net 336,097 233,129
Other assets:
Restricted cash - 50,000
Product development costs, net 83,635 72,498
License rights,net 13,890 16,777
Investments including available-for-sale
securities 97,513 48,267
Other assets 43,694 36,351
Deferred income taxes 48,165 24,410
Goodwill, net 42,733 41,783
Total assets $1,383,161 $ 846,688
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 68,485 $ 69,703
Other accrued expenses and liabilities 301,275 297,298
Deferred revenue 174,392 166,007
Accrued personnel costs 31,385 20,008
Current portion of long-term debt and
capital lease obligations 1,971 1,454
Total current liabilities 577,508 554,470
Long-term liabilities:
Notes payable 371,391 50,000
Deferred income taxes 48,165 24,410
Deferred revenue 79,384 86,040
Minority interests 313 2,674
Other liabilities 843 1,060
Total liabilities 1,077,604 718,654
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized, 1,000 shares issued and
outstanding at December 31, 1997 and
June 30, 1997 1 1
Common stock, $.01 par value, 300,000,000
shares authorized, 104,214,103 and 100,188,971
shares issued and outstanding at December 31,
1997 and June 30, 1997, respectively 1,042 1,002
Additional paid-in-capital 738,991 617,221
Unrealized gain on available-for-sale
securities 32,705 16,924
Accumulated deficit (467,182) (507,114)
Total stockholders' equity 305,557 128,034
Total liabilities and stockholders'
equity $1,383,161 $ 846,688
See accompanying notes.
Questions/Observations:
Increase in some recorded assets:
1. Trade accounts receivables increased significantly (by 21 million)
this can be considered normal given the increase in advertising
revenue reported. However, In reading the 10Q I will look for hits
that may indicate they are playing games with revenue recognition
(e.g. suppose a client signed a 1 year contract for advertising, from
7/1/97-6/30/98. AOL should only recognize 50% of the contract
proceeds as 97 revenues (regardless of whether or not the advertising
was paid in advance). There will always be significant room to play
around with revenue recognition. Deferred revenue a liability which
reflects advertising services to be rendered increased by only 8
million, I would argue that given the significant increase in
revenues reported, the increase here should probably be higher,
unless they did not contract much 1998 advertising business towards
the end of 97. Actually, if one looks at the total deferred revenue
figure taking toghether the short and long term portion one sees the
total is about the same for 6/30 and 12/31. This is highly
suspicious. A company reporting such tremendous growth in revenues
has no growth on advertising services to be rendered in the future?
2. I would question the capitalization of what I believe should have
been costs showing up in the Income Statement instead of being
capitalized as assets in the Balence Sheet. I would argue that the
increases in:Product Development costs (over 11 million), Goodwill (1
million) should have gone to the IS as a cost.
3. On the liabilities side, We see the company has significantly
increased its leverage with a debt equity ratio of about 3, following
issuing of debt.
Now let's look at the income statement:
AMERICA ONLINE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
Three months
ended
December 31,
1997 1996
(Unaudited) (Unaudited)
Revenues:
Online service revenues $ 483,165 $ 351,220
Advertising, commerce and other
revenues 108,831 58,192
Total revenues 591,996 409,412
Costs and expenses:
Cost of revenues 385,986 261,888
Marketing 96,820 151,834
Product development 23,632 19,755
General and administrative 50,663 29,157
Amortization of goodwill 2,161 1,589
Restructuring charge - 48,627
Settlement charge (1,009) 24,300
Total costs and expenses 558,253 537,150
Income (loss) from operations 33,743 (127,738)
Other income (expense), net 741 (1,367)
Income (loss) before provision for
income taxes 34,484 (129,105)
Provision for income taxes (13,716) -
Net income (loss) $20,768 $(129,105)
Earnings (loss) per share-diluted $ 0.17 $ (1.37)
Earnings (loss) per share-basic $ 0.20 $ (1.37)
Weighted average shares outstanding-diluted 120,379 94,284
Weighted average shares outstanding-basic 103,184 94,284
Questions: In reading the 10Q I would look for answers/explanations
to the following:
1. Advertising revenues almost doubled. However, from the numbers
in the balance sheet discussed above it looks like some of these
revenues may be for services to be advertising rendered beyond 12/31.
And thus should be recignized later.
2. Marketing are significantly lower than for Q4 96. This is
probably related to the big hit they had to take when they started to
recognize marketing efforts as a cost (they used to consider these
cost an asset capitalized in the BS!). But still, I wonder if they
will be capable to maintain/gain market share with drastically
reduced marketing efforts in light of the increased competition/price
increase. Someone mentioned they don't mail out as many CD's
anymore, they now install the software in new PC's. How about
advertising, etc. In general, when you reduce marketing efforts your
revenues suffer.
3. There is a significant increase (compared to revenues) in S&A
expenses. I would be concerned about having such a high cost
structure in a low margin increasingly competitive business.
Probably the answer will be: Yeah, we will overcome the cost
disadvantage by becoming the abc [the TV network] of the net, several
billions in ad revenues
Cash Flow statement. IMO this one is the most inportant financial
statement and the one more difficult to analyze. Unfortunatelly
they do not show a Q4 CF statement (they are not required to do so)
they show one for a six month period 6/30/97-12/31/97 so I present
the Income and cash flow statements for the period to show how
different the CF and net income picture can be.
AMERICA ONLINE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
Six months
ended
December 31,
1997 1996
(Unaudited) (Unaudited)
Revenues:
Online service revenues $ 917,332 $662,352
Advertising, commerce and other
revenues 196,302 97,042
Total revenues 1,113,634 759,394
Costs and expenses:
Cost of revenues 712,987 463,042
Marketing
Marketing 194,622 230,977
Write-off of deferred subscriber
acquisition costs - 385,221
Product development 39,447 38,339
General and administrative 104,974 49,261
Amortization of goodwill 3,837 3,509
Restructuring charge (1,306) 48,627
Settlement charge (1,009) 24,300
Total costs and expenses 1,053,552 1,243,276
Income (loss) from operations 60,082 (483,882)
Other income, net 6,068 1,088
Income (loss) before provision for
income taxes 66,150 (482,794)
Provision for income taxes (26,218) -
Net income (loss) $ 39,932 $(482,794)
Earnings (loss) per share-diluted $ 0.33 $ (5.15)
Earnings (loss) per share-basic $ 0.39 $ (5.15)
Weighted average shares outstanding-
diluted 119,376 93,727
Weighted average shares outstanding-
basic 102,119 93,727
See accompanying notes.
AMERICA ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)
Six months
ended
December 31,
1997 1996
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ 39,932 $(482,794)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Write-off of deferred subscriber
acquisition costs - 385,221
Non-cash restructuring charges (2,315) 19,937
Depreciation and amortization 56,843 28,363
Amortization of subscriber acquisition costs - 59,189
Compensatory stock options 23,629 -
Deferred income taxes 26,218 -
Changes in assets and liabilities:
Trade accounts receivable (21,480) (3,258)
Other receivables (4,260) 4,435
Prepaid expenses and other current assets 26,383 (18,690)
Deferred subscriber acquisition costs - (130,229)
Other assets (22,562) (5,976)
Trade accounts payable (1,064) 27,211
Accrued personnel costs 11,401 (6,241)
Other accrued expenses and liabilities 19,985 93,017
Deferred revenue 1,729 57,472
Other liabilities (217) (255)
Total adjustments 114,290 510,196
Net cash provided by operating activities 154,222 27,402
Cash flows from investing activities:
Purchase of property and equipment (153,323) (29,779)
Product development costs (26,994) (31,976)
Other investing activities (2,345) 10,237
Net cash used in investing activities (182,662) (51,518)
Cash flows from financing activities:
Proceeds from issuance of preferred stock
in subsidiary - 15,000
Proceeds from issuance of common stock, net 51,025 21,337
Proceeds (payments) on long-term debt 735 (540)
Proceeds from notes payable, net 370,625 -
Proceeds (payments) under capital lease
obligations (85) 87
Restricted cash 50,000 -
Payments on line of credit (50,000) -
Net cash provided by financing activities 422,300 35,884
Net increase in cash and cash equivalents 393,860 11,768
Cash and cash equivalents at beginning of period 124,340 118,421
Cash and cash equivalents at end of period $518,200 $130,189
Supplemental cash flow information
Cash paid during the period for:
Interest $4,177 $ 861
Income taxes - -
Analysis: The CF statement starts with net income for the period and
then makes a series of adjustments to covert this figure into a cash
flow because there are costs/revenues which do not affect the cash
account (for example depreciation or a the cost of a service received
but not paid for. Also, there are changes in the cash account that
are not reflected in the income statement. For example, the proceeds
from the debt issue cannot be seen in the IS).
So the CF statement starts with a net profit of 39 million vs. a loss
of 482 million for the year ago period(not bad. Remember, however,
that last year they had to take a big hit because of the accounting
tricks they were playing. Will this happen again?)
If we look at cash flow from operations (probably the most important
single number in the whole 10Q). We see a significant increase to
157 million, almost a five fold increase. This is not bad. The only
concern is whether this was a result of reducing too much marketing
expenses (44 million lower than year ago) it was also the result of
increasing liabilities by 20 million and accrued personnel costs by
11 million (these liabilities will eventually be paid out in cash.
So my adjusted cash flow from operations would be appx:
157-44-20-11= 82 million. Still not bad. The only doubt is whether
this number reflects significant receipts of cash for future
advertising services.
Now let's look at net cash flow from operations and Investment
activities (this is called the free cash flow).
CF from Investment activities increased more than three fold to a
negative 182 million. This gives a negative free cash flow but I
consider this normal for a growing company like AOL.
CF from investment activities is of course positive and reflects cash
obtained from debt financing.
More later. Got to run. I see significant revenue growth (will it
continue in the future?) I see AOL is starting to become profitable
(will they continue to improve this in the future in such a
competitive field?). Does the current P/E of close or above 100 and
market cap of 11+ billion (about 1/4 of overpriced WLA, 1/6 of
overpriced PG. Both companies very profitable with huge revenues
free cash flows). Justified? I don't think so.
Pancho |
