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Technology Stocks : America On-Line: will it survive ...? -- Ignore unavailable to you. Want to Upgrade?

To: Ob C Qwe US who wrote (7525)	2/11/1998 8:50:00 AM
From: Pancho Villa	Read Replies (2) \| Respond to of 13594

TO All: I know my view is biased but after a quick glance at AOL's press release (still waiting for the real thing: i.e. the 10Q), there are some things that just don't seem right! For example, they are not making ANY MENTION AT ALL of how the compuserve deal is one of the key factors in membership/revenue increase. If they are such a serious company why hide it? Any decent write up/analysis of business results sure should comment on a significant portion of the growth not being internally generated but purchased! They don't discuss either that some of the increased cost in Internet access charges are related to the swap they made with WCOM. Check this out compuserve deal not mentioned once! are analysts/investors this stupid?: AOL said its quarterly increase of 1,267,000 million new members worldwide slightly exceeded the growth of its previous best quarter, a year earlier, when the company introduced its flat-rate pricing plan. Membership reached over 10.7 million on Dec. 31, and surpassed 11 million on Jan. 20. The company's marketing expenses during the fiscal 1998 December quarter were reduced to $96.8 million, or 16.4% of revenues, from the prior year period's $151.8 million or 37.1 % of revenues. No wonder they increased customer base significantly while reducing marketing expense, the growth was mainly due to the Compuserve deal! Are they again plain games with capitalization of expenses/costs?: From their balance sheet we see an increase of over 10 Million in Product development costs. 83,635,000 in 12/30/97 from 72,498,000 in 6/30/97. It is paradoxical that the actual item in the Assets portion of the balance sheet is labeled: Product development costs, net which is contradictory! These are mainly R&D costs which should be expensed as most businesses do! Particularly if these are related to software development! Any views? Notice that Assuming half of this costs took place during this quarter; then Income would decline by roughly 3.5 million after tax or about 3 cents per diluted share! making all the difference! My impression is that the CFO has a lot of pressure to use flexibility in reporting to the max in order to report favorable numbers. Hope he is not stepping over the line! Companies with truly strong results have no need to do this. MSFT doesn't, INTC doesn't. I also have doubts about revenue recognition. The CF statement shows a receivables related negative adjustments of 21.5 million (Trade 18.4 + Others 3.1. This is just the net increase in receivables which is not a cash flow as they have not been paid yet. Thus the negative adjustment to net income). Are they recognizing prepaid advertising as part of their current revenues? This may be the case! This would be odd as they should recognize the advertising revenue only when the service is rendered. For example if someone paid them 1 million for six months of banners starting September 97 they can only recognize half of that on 12/30/97. It would be nice to have some unbiased auditors to have a peek at these statements ASAP, but we may have to wait until the end of their fiscal. Unfortunately Pancho is just a little Mexican guy with no power to get the cops down to AOL to sniff at the books ASAP! IMO the books were "massaged" to show a number that sligthly beat expectations. Pancho I wish some of the hot shot analysts bother about this things. If you know/have contact with any of them please send them my questions. Pancho

To: Ob C Qwe US who wrote (7525)	2/11/1998 9:01:00 AM
From: Pancho Villa	Read Replies (1) \| Respond to of 13594

More on AOL: From the Income statement it is surprising to see how low marketing expenses were last quarter! Notice the huge write of that the copsmade them take the second semester of 96 for wrongly capitalizingmarketing expenses. Ignoring this, Marketing related expenses forthat period were 230.9 million it has gone down to 194.7 million in the last half of 97! Traceable to a dramatic decline in marketing expenses in the last quarter of 97: only 96 million versus 151 million the year ago period! Something is BERY BERY FISHY here. Do they really stopped sending out all those CD's out? Are they back to capitalizing marketing expenses? America Online, Inc. Consolidated Summary of Results (Amounts in thousands, except per share data) Three months ended Six months ended Dec. 31, Dec. 31, ------------------ ------------------ 1997 1996 1997 1996 ------------------ ------------------ (Unaudited) (Unaudited) (Unaudited) (Unaudited)Revenues: Online service revenues $ 483,165 $ 351,220 $ 917,332 $ 662,352 Advertising, commerce and other revenues 108,831 58,192 196,302 97,042 --------- --------- --------- --------- Total revenues 591,996 409,412 1,113,634 759,394 Costs and expenses: Cost of revenues 385,986 261,888 712,987 463,042 Marketing Marketing 96,820 151,834 194,622 230,977 Write-off of deferred subscriber acquisition costs -- -- -- 385,221 Product development 23,632 19,755 39,447 38,339 General and administrative 50,663 29,157 104,974 49,261 Amortization of goodwill 2,161 1,589 3,837 3,509 Restructuring charge -- 48,627 (1,306) 48,627 Settlement charge (1,009) 24,300 (1,009) 24,300 --------- --------- --------- --------- Total costs and expenses 558,253 537,150 1,053,552 1,243,276 Income (loss) from operations 33,743 (127,738) 60,082 (483,882)Other income (expense), net 741 (1,367) 6,068 1,088 --------- --------- --------- --------- Income (loss) before provision for income taxes 34,484 (129,105) 66,150 (482,794) Provision for income taxes (13,716) -- (26,218) -- --------- --------- --------- --------- Net income (loss) $ 20,768 $(129,105) $ 39,932 $(482,794) ========= ========= ========= =========