a little more info
NEW YORK (Dow Jones)--Although fiscal second-quarter earnings at
America Online Inc. (AOL) beat Wall Street expectations, analysts warned
that a network cost benefit the online service provider recorded in the quarter
may be hiding the full impact of a drop in gross margins.
As reported, America Online posted net income of $20.8 million, or 17 cents
a diluted share, compared with a loss of $129.1 million, or $1.37 a diluted
share, during the year-ago period. Revenue rose to $592 million from $409.4
million in 1996.
Earnings per share for the latest quarter were a penny above consensus
expectations. But Lauren Rich Fine, an analyst at Merrill Lynch & Co., noted
that results may have been helped by a $17 million network cost accrual
benefit. The analyst wasn't immediately available for comment. She did keep
her ratings for the on-line service at a short-term accumulate and long-term
buy.
The "catch-up" benefit apparently offset network costs from prior quarters,
Nesbitt Burns Securities Inc. analyst Abhishek S. Gami explained. He said
that AOL records these expenses using an estimate of their actual cost, and
then makes an adjustment when the figures come in.
In a research note, Fine said the benefit may have "masked (the) full decline"
of gross margins, if it was used to offset cost of revenues. Gross margins,
Fine said, fell to 34.8% from 38.1% a year ago and 37.3% in the first quarter,
mainly due to subscriber growth and increased usage.
Fine said gross margins before the benefit may have been as low as 32%,
which to her suggests that the $2 hike in monthly charges AOL recently
announced was more necessary than the company has let on.
Gami said the benefit "probably did mask" lower gross margins. Future
network costs should be closer to company projections, he added, increasing
the likelihood of reduced margins without the extra help.
Commenting on concerns that have come up previously about AOL's
accounting methods, Gami admitted "that AOL has run into questionable
issues in the past about how they account for things," and added that he is
curious to see how the company's books will treat its acquisition of
CompuServe.
But Gami said it is also important to remember AOL is still growing its
platform and hasn't yet reached a mature phase, which leads people to cut it
a little slack.
In composite trading, NYSE-listed AOL was up 4.6%, or 5 1/16, at 114 1/16,
on volume of about 2.4 million, compared with average daily volume of nearly
2 million.
Company officials weren't immediately available for comment. |
