The Proctor and Gamble deal should prompt others to advertise also...
January 28, 1999
AOL Trounces Earnings Forecasts
As Firm's Net Profit Quadruples
By KARA SWISHER
Staff Reporter of THE WALL STREET JOURNAL
America Online Inc. beat Wall Street expectations for its
fiscal second quarter, reporting strong earnings and
revenue growth thanks to a robust rise in holiday
electronic commerce and a surge in its member base.
The company also announced a 2-for-1 stock split and an
important advertising deal with Procter & Gamble Co.
AOL's net income quadrupled to
$88 million, or 17 cents a diluted
share, from $20 million, or four cents a share, in the
year-earlier period. The consensus estimate of Wall
Street analysts was 14 cents a share.
Revenue for the Dulles, Va., online service jumped 62%
in the period ended Dec. 31 to $960 million from $592
million. In New York Stock Exchange composite
trading, its shares climbed $10.50, or 6.8%, to close at
$165.50. AOL reported the results after markets closed
Wednesday, but in after-hours trading the stock hit $167,
according to Instinet Inc.
AOL membership, too, surged in the quarter, with 1.6
million new members joining the service. That brings the
total subscriber base to 15.1 million members, who
typically pay a monthly fee of $21.95 to use the service.
That figure doesn't include the CompuServe division's
two million paying members, or the tens of millions of
people who use a variety of free AOL properties such as
ICQ, a Web-based chat service.
"I think we have shown great results across the board,"
said Steve Case, AOL's chairman and chief executive
officer. "There's lots of momentum and steady progress,
which is why I think we have become a blue-chip
company in the Internet sector."
Higher Margins
Mr. Case said over the past several quarters the
company displayed a discipline that allowed it to
improve margins -- operating margins rose to 13.6%
from 12.9% in the previous quarter, while gross margins
rose to 38.5% from 36.4%. That improvement occurred
in spite of slightly higher marketing expenses, which
accounted for 14% of revenue compared with 12.2% in
the first quarter.
Mr. Case said he was
heartened by an increase in
AOL's advertising and
electronic-commerce
revenue, which climbed
22% to $126 million from
the previous quarter's $103
million. That gain in
revenue, however, lags
behind the increases
reported by rival Yahoo
Inc., which saw its advertising and electronic-commerce
revenue rise 38% during the period.
AOL's revenues in those areas are likely to improve
with the ad deal with consumer-products giant P&G and
other major advertisers AOL expects to attract. Mr. Case
said that more traditional companies like P&G, which
haven't been active online, are beginning to see the
benefits of advertising on the Internet. "They have a
greater sense of urgency about moving into this space,"
he said.
P&G Deal
The deal with P&G, which was announced to analysts by
AOL President Bob Pittman in a conference call after the
earnings were released, is a bellwether. A P&G
spokeswoman confirmed the company has "entered into
a relationship" with AOL, but declined to give terms of
the deal. P&G said last year it had spent $3 million on
Internet advertising during one quarter, prompting
speculation that the company's annual Internet spending
could top $12 million.
P&G said the first ads appearing on AOL will be the
company's Scope Send-a-Kiss campaign prior to
Valentine's Day. The campaign uses a pop-up box that
users can click on and send an e-mail "kiss" -- a
message and animated lips dancing across the screen.
"We've made a media buy" with AOL, said P&G
spokeswoman Gretchen Briscoe. "Beyond that we'll
work with AOL to figure out new and innovative
approaches to marketing online specifically within the
AOL network."
Subscription fees still made up the bulk of AOL revenue,
increasing to $779 million in the quarter, or 81% of total
revenue. AOL said its members had increased their
average daily usage of the service to 48 minutes from 41
minutes a year ago.
Separately, AOL also said it had signed a $13 million,
multiyear deal with fast-growing Qwest
Communications International Inc., which provides
high-speed access services. The deal follows a lot of
activity by AOL in its most recent quarter: announcing
the acquisition of Netscape Communications Corp., a
rollout of high-speed access with Bell Atlantic Corp.
and a major content deal with broadcaster CBS Corp.
Mr. Case said the
acquisition of Netscape is
moving ahead and should
be completed in the early
spring. The company
recently scored a coup by
hiring Netscape co-founder
Marc Andreessen as its
chief technology officer, a
move that is likely to boost
morale and retention among
Netscape employees in Mountain View, Calif.
But AOL also cut some longstanding ties, shedding its
9.5% stake in Excite Inc., which announced on Jan. 19
that it will be acquired by AOL competitor At Home
Corp. AOL sold 4.9 million Excite shares for $100 each
on Jan. 20, according to a filing it made with the
Securities and Exchange Commission Wednesday. The
sale yielded AOL $500 million, boosting cash and
short-term investments to $2 billion. Company officials
said the money will be used for other acquisitions and
improvements to the service.
Analysts seemed buoyed by AOL's results, which were
stronger than expected.
"They have shown they still have a lot of leverage in
their model," said Henry Blodget, an analyst with CIBC
Oppenheimer in New York. "This is one of the strongest
quarters they have shown and displays a real
momentum."
The stock split -- coming only months after the
company's most recent stock split, in mid-November --
could further that momentum, said Mr. Blodget.
AOL said Wednesday that on Feb. 22, stock of record
Feb. 8 will receive one additional share for every share
they own. After the split, its sixth since its public
offering in 1992, AOL will have 933 million shares
outstanding.
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