Analysis of 10Q Continued as reply to previous post. IMO an important post! please read and give me feedback. I wish the big fish longs who have not read the 10Q (read this one!Cramer are you there? - I am assuming he is a big fish, not due to the size of his hedge fund but due to his power through thestreet.com)
Key points in the 10K: revenue base is growing at a high rate, but company is still very concerned about diminishing costs due to flat rate pricing in light of increased use per member. This is the key reason for the $2 hike. IMO usage per customer may be going up at an alarming rate.
They think advertising electronic commerce revenues will save them. These have increased significantly but a lot of my questions were not answered. For example, if a significant chunk of the revenue came from a single client [as someone mentioned in the roger's thread some crazy long distance carrier that gave them 100 million] THEY SHOULD have disclosed this so that people see this may be "an extraordinary adv. revenue item not indicative of the true growth in advertising/elec. commerce... Well they do not explain in any detail where the increase is coming from! Also, not a single word on principles regarding adv. revenue recognition [do they go ever this in the 10K?].
The bottom line I think AOL manipulated reporting of advertising and electronic commerce revenue by: 1. not mentioning "one of a kind" crazy deals [like the long distance company that gave them 100 million] and 2. by recognizing significant amounts of adv. revenue before they rendered the services. They explain in very little detail the most critical area from which they think future grwoth will come. BERY BERY BERY fishy. IMO advertising revenues will not turn out to be what people think! How is this for a detailed explanation of their presumably most important source of future revenue. Casey: Where is the ad money coming from? any large clients that may not repeat? Are you sure some banners for which you fully recognized the revenue in 97 for aren't staying beyond 12/31/97?
Advertising, Commerce and Other Revenues For the three months ended December 31, 1997, advertising, commerce andother revenues, which consist principally of the sale of merchandise,advertising and related revenues, transaction fees associated with electroniccommerce and data network service revenues, increased from $58.2 million to$108.8 million, or 87%, over the three months ended December 31, 1996. For thesix months ended December 31, 1997, advertising, commerce and other revenuesincreased from $97.0 million to $196.3 million, or 102%, over the six monthsended December 31, 1996. The increase in both periods was driven primarily bymore advertising on the Company's online service and increases in the sale ofmerchandise, primarily due to an expanded number of products offered for sale tothe Company's larger subscriber base. Advertising and electronic commercetransaction fees increased by 181% and 234%, respectively, in the three and sixmonth periods ended December 31, 1997, from $18.7 million in the three monthsended December 31, 1996, to $52.5 million in the three months ended December 31,1997, and from $28.8 million in the six months ended December 31, 1996 to $96.1million in the six months ended December 31, 1997. Merchandise sales increasedby 28% and 32%, respectively, in the three and six month periods ended December31, 1997, from $25.5 million in the three months ended December 31, 1996, to$32.7 million in the three months ended December 31, 1997, and from $43.3million in the six months ended December 31, 1996 to $57.3 million in the sixmonths ended December 31, 1997. At December 31, 1997, the Company's advertisingand electronic commerce backlog, representing the minimum contract value ofadvertising and electronic commerce agreements signed, less revenues alreadyrecognized from these agreements, was approximately $320 million, up fromapproximately $16 million at December 31, 1996. Commencing with the sale of ANS on January 31, 1998 (See Note 7 of Notes to Consolidated Financial Statements), the Company will no longer report data service revenues as a component of Advertising, Commerce and Other Revenues. The Company is unable to predict the effect of the $2.00 per month price increase on subscriber acquisition and retention rates. Any effect onsubscriber acquisition and retention rates may impact the rate of growth inadvertising, commerce and other revenues.
Take a look at the screw ball they trow at the end of the 10Q. A change in accounting rules whci they will start using in 1/98 so that it did not hit the Q497 10Q but will be retroactive to 7/97 for 10K purposes! talk about manipulation! a solid company does not need these tricks:
Beginning with the three months ending March 31, 1998, the Company willchange its method of accounting for income taxes. Prior to January 1, 1998, theCompany followed the practice of computing its tax provision on the assumptionthat stock option deductions were used first to offset its financial statementincome, providing a charge in lieu of tax and crediting the resulting benefit to stockholders' equity. The Company will change its accounting for income taxesto consider temporary differences and net operating loss carryforwardsdetermined before stock option deduction before recognizing tax benefits fromstock option deductions. Based on the information available, the Company'sprovision for income taxes for the six months ended December 31, 1997 would besubstantially eliminated due to the change in accounting for income taxes beingretroactive to July 1, 1997.
Bery confusing right? what they are trying to say is that the 10Q you just read does not account properly for stock option compensation in the Income Estatement!
I think they do a pretty good job at analyzing competition. Not because they want to inform you but to avoid legal problems:
The Company competes in a rapidly changing marketplace with a wide range ofother companies in the communications, advertising, entertainment andinformation, media, direct mail and commerce fields. Current competitors of theCompany for usage, subscribers and for advertising and electronic commerceinclude not only Internet service providers and online services, (including theMicrosoft Network, Prodigy Services Company, and various national and localInternet service providers, long distance and regional telephone and cablecompanies, including, among others, AT&T Corp., MCI Communications Corporationand various regional Bell operating companies), but also Web-based Internetservice providers using industry-standard browser and navigational software,telephone companies who may offer competing services directly to their customersas part of their telephone service and suppliers of operating systems who mayincorporate functional equivalents to the Company's services in their products.The Company also competes for usage and advertising and electronic commercerevenues with major Web sites operated by search services and other companiessuch as Yahoo! Inc., Netscape Communications Corporation, CNET, Inc., Lycos,Inc. and Excite, Inc., with global media companies such as newspapers, radio andtelevision stations and content providers, such as CBS Corporation, The WaltDisney Company and Time Warner, Inc., and with direct marketing andtelemarketing companies. The development of midband and broadband distribution technologies,including cable Internet access services offered by @Home Network, Road RunnerGroup (owned by Time Warner, Inc.) and MediaOne, Inc. (a subsidiary of US WESTMedia Group), advanced telephone-based access services offered through digitalsubscriber line (DSL) technologies offered by local telecommunications companiesand other advanced digital services offered by broadcast and satellitecompanies, is intensifying the competition to which the Company is subject.Emerging convergent technologies offering combinations of television andinteractive computer services, such as those offered by WebTV and NetChannel,offer yet an additional competitive alternative to the offerings of the Company. Some of the present competitors and potential future competitors of theCompany may have greater financial, technical, marketing and/or personnelresources than the Company. The competitive environment could (i) require pricereductions and increased spending on marketing, network capacity, contentprocurement and product development, (ii) limit the Company's opportunities toenter into and/or renew agreements with content providers and distributionpartners, (iii) limit its ability to develop new products and services, (iv)limit its ability to continue to grow its subscriber base, (v) result inincreased attrition in the Company's subscriber base and (vi) negatively impactthe Company's ability to meet its business objective of changing its businessmodel into one in which more revenues and profits are generated from sourcesother than online service subscription revenues, such as advertising andelectronic commerce. Any of the foregoing events could have an impact onrevenues or result in an increase in costs as a percentage of revenues, whichcould have a material adverse effect on the Company's business, financialcondition and operating results.
What do you think will happen to them if ATT and MCI/worlcom start advertising greatly reduced rates to their clients as a hook to get their long distance business. MCI is already charging me only 14.95 for excellent service. How long do you think it will take until they start using ownership of the backbone as a competitive weapon?
Pancho
PS: In regards to long term results, some of the points I try to make seem nit picking within the big picture some people have for AOL. These semingly small uninportant little things have a significant impact on reported quarterly earnings before extraordinary items the stuff that moves short term stock prices many billions of dollars involved!. |
