Also article in IDB today on AOL
investors.com
AOL Works Out Kinks, Is Primed For Big Pitch
Date: 10/22/98
Author: Doug Tsuruoka
It seems they're everywhere - CDs in cardboard sleeves with America
Online Inc.'s logo emblazoned on the front.
Thousands of free sign-up disks are sent through the mail or distributed in
malls and stores across the U.S. At October's Internet World trade fair in
New York, there were not only disks, but baskets filled with blinking buttons
that read: ''I'm an America Online member.''
It wasn't long ago that irate AOL customers would have complained about
such a promotion. The company's overtaxed network kept going down.
Thoughts of handling an additional 450,000 customers - the number of new
AOL accounts opened in July and August -would have been unfathomable.
But that was then; this is now.
''AOL's built a huge platform, and they are poised to expand operating
margins as they grow,'' said Scott Ehrens, analyst with Bear, Stearns & Co.
in New York.
AOL has spent $1 billion to boost capacity and speed customer access in
the past 18 months. It plans to spend another $1.75 billion in fiscal '99 for
system improvements.
The step has been critical in reducing the system crashes, power outages
and ''waits'' that have plagued its service over the years.
''Two years ago we were surprised by some dramatic growth,'' said Barry
Schuler, president of America Online's interactive services unit. ''We made
a management pact that we were not going to let that happen again.''
The company's network can now handle a peak of 750,000 simultaneous
users, compared with 400,000 a year ago. AOL also has multiplied the
number of connections available to its members. It added 350,000 such
devices over the past year, for a total of 800,000. AOL expects to have
more than 1 million modems in place by the end of fiscal '99.
And as it adds capacity, AOL is making sure it has enough customers to
use it.
Scott Reamer, analyst with S.G. Cowen Securities Corp. in New York,
estimates AOL spent $115 million on marketing to attract new members in
the quarter ended Sept. 30.
Bear Stearns' Ehrens adds AOL's heavy marketing should pay off. AOL's
worldwide membership will hit 16.3 million by the end of '99 and 19.6 million
at the end of '00, he says. AOL now is the world's biggest online service,
with 12.5 million members. Part of that is due to its September '97 purchase
of CompuServe Corp.
Promotions also are helping the bottom line.
The company reported operating earnings of $57.3 million, or 23 cents a
share, on revenue of $792.3 million for the fourth quarter ended June 30.
That compares with $475.7 million in sales and earnings of $5.6 million, or 3
cents a share, for the same period a year ago. (Results from AOL's '99 first
quarter ended Sept. 30 are due Oct. 27.)
For fiscal '98, America Online had revenue of $2.6 billion, up 54% from $1.7
billion a year ago. Income before charges came to $134 million, or 55 cents
a share. This compares with a loss of $13.4 million the prior year.
Things clearly are moving in AOL's favor. There are, however, a few
potential bumps in the road ahead.
James Preissler, analyst at PaineWebber Inc. in New York, sees a hurdle for
AOL in the possible changeover to so-called ''broadband'' technology. This
allows for much faster Internet access over regular phone lines and
systems such as cable networks.
Broadband technology currently is the domain of telecom, cable and digital
subscriber line (DSL) companies. This has raised questions about how the
government should regulate access to broadband for outside industries
such as Internet service providers.
The Federal Communications Commission is mulling how to handle the
issue. But if AOL moves into broadband technology with the help of cable
and DSL companies, there could be a temporary slowing in subscriber
growth. Major product transitions or upgrades - such as broadband tech -
can interrupt subscriber growth, Preissler says.
''There could be a major blip in (AOL's) buying cycle as people hold off,'' he
said.
Preissler says there are no actual signs that AOL faces such a problem.
Washington must settle the access issue first. But if AOL moves into
broadband tech, Preissler says, the change should be watched carefully.
AOL's Schuler says a quarter of its members are moving up to the latest
version of its software, AOL 4.0. Average AOL use stands at a record 47 to
48 minutes a day, up from 44 minutes in the last quarter. ''The main reason
why people are buying computers (for the) home now is to go online,''
Schuler said.
Analysts note AOL also is doing well despite raising the price of its unlimited
dial-up service from $19.95 to $21.95 a month earlier this year. The hike
barely dented its subscriber base, which increased by 665,000 to 12.5
million members in fiscal '98.
AOL's stock also continues to rate a ''buy'' with analysts despite recent
market turmoil. With memberships surging and the company using its
market position to cut lucrative deals with other Web companies, some
consider AOL undervalued.
AOL faces a few other challenges, though. One is Microsoft Corp.'s push to
turn its MSN.com online service into a more serious rival of large Internet
players such as Yahoo Inc. and AOL. Microsoft recently expanded the
electronic-mail, search and chat features on MSN.
PaineWebber's Pressler says the step is aimed more at ''search'' providers
like Yahoo, rather than full-service, subscriber-based Internet providers like
AOL.
Unlike AOL, MSN has no paid subscribers. It's accessible via the Net the
same way users ''visit'' Yahoo. Most analysts, however, say Microsoft may
make a more direct challenge to AOL in the future.
(C) Copyright 1998 Investors Business Daily, Inc.
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