Great earnings and ad revenues but doubts about TWX merger will cap AOL progress to 88.
America Online Busts Loose on Strong Ad Sales
by Pat Dorsey | 08:12 PM | 04-18-00
America Online's AOL ownership of some of the world's most valuable cyber-real estate helped the Internet giant beat Wall Street estimates of $0.09 by $0.02 when it reported excellent fiscal third-quarter results late Tuesday. The company's overall top line swelled 47% to $1.8 billion, powered by robust subscriber growth and very strong advertising and e-commerce revenues.
In fact, the huge surge in revenue from advertising and e-commerce was the key to AOL's strong performance, with this high-margin revenue stream nearly doubling in size to more than $550 million. Management was careful, however, to characterize this increase as a "spike," cautioning that the growth of advertising and e-commerce revenue would likely moderate somewhat in the future.
The other piece of good news was that even though AOL members are increasing the amount of time they spend online, which helps AOL make money from advertising and e-commerce, AOL has been able to keep a tight rein on the cost of providing network access. Declining network costs were a big reason why AOL was able to eke out yet another improvement in its gross margin, which came in at a record 49%. (Gross margin is the percentage of revenues left over after subtracting cost of goods sold.) AOL also kept operating-expense growth below revenue growth, further plumping up the company's bottom line.
Going forward, AOL's big challenge will be to show that its brand is as powerful on non-personal-computer platforms as it has been on the PC. The company's multipronged "AOL Anywhere" strategy is aimed at making its services available through television set-top boxes, mobile smart phones, and stripped-down computers called Internet appliances. AOL's management said as much during Tuesday's post-release conference call, mentioning Microsoft's MSFT "stranglehold" as major reason for AOL's strategy of de-emphasizing the PC in favor of a "fresh start" on next-generation appliances.
Right now, this is a strategy long on promise and short on specifics, as AOL has a number of promising intiatives in place that have yet to bear fruit. But the company has hinted at an incipient deal to provide AOL services over merger partner Time Warner's TWX cable networks in the near future, which could help flesh out AOL's post-PC plans.
Although there's plenty of room for error in AOL's massive merger with media giant Time Warner, the joining of the two companies appears to be proceeding about as well as one could hope. Given that AOL's shares are reasonably valued as Internet giants go, investors willing to take on some risk would do well to look at AOL's shares before Wall Street's euphoria for the company returns. |
