FOOL CONFERENCE CALL SYNOPSIS*
By Dale Wettlaufer (MF Raleigh)

America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>
22000 AOL Way
Dulles, VA 20166
(703) 448-8700
http://www.aol.com

ALEXANDRIA, Va., November, 8, 1996/FOOLWIRE/ --- Total revenues increased $152 million, or 77 percent. Service revenues were up $133 million, or 74 percent, and other revenues doubling to about $39 million. The increase in service revenues was driven by a 72 percent increase in domestic subscriber growth as increased merchandise and advertising revenue contributed to the doubling of other revenues during this period comparison. Total revenue was up 5 percent over last quarter with service revenues up $8 million to $311 million and other revenues up about 25 percent from $31 million to $39 million. Driven by these increases in revenues a 6.39 percent improvement in gross margins year-over-year, earnings per share (EPS) grew from $0.06 EPS to $0.17 EPS. The reason AOL had to use 93 million shares is that it excludes the common stock equivalents, which is required by the accounting literature when they convert a net loss to earnings per share.

AOL'S STRATEGIC POSITION. The June and September quarters were a transition period where the company will focus on improving the quality of the product, investing in infrastructure, improving service levels and ensuring that the supply lines were in place to handle the expected demand and to improve retention. They believe the issues that have been dogging the company -- Web browser, unlimited pricing, etc. -- have now been addressed and with national advertising, strong word of mouth and market buzz it should become that AOL provides the best consumer value. Given the new Windows 3.0, Windows95 and Macintosh versions of AOL with integrated Explorer Browser coupled with the new major national ad campaign and a limited pricing plan, they are uniquely positioned for growth in consumer online services.

OTHER REVENUE BREAKDOWN. Commerce, including advertising and transactions, increased 62 percent to $13 and merchandise increased 25 percent to $18 million. On a per member basis, they captured about a $1.60 per month in electronic commerce, or a 31 percent increase over the June quarter. Even though the customer base grew only about 6 percent sequentially, revenue capture from electronic commerce increase 31 percent. Continuing the leverage the customer base remains an important priority. The rest of other revenues constitute ANS sales and service to non-AOL customers during the quarter.

SUBSCRIBER GROWTH. During the quarter, America Online added 365,000 new subscribers in the United States, up from the 312,000 they added in the June quarter. Average monthly revenue capture per subscriber in the September quarter was about $16.85, less than their target and due principally to the August 8th outage. Adding that back they are in the $17.25 range, in line with the target set forth last quarter. Usage increased from 6.45 hours to 6.95 hours, a number that is trending up. International membership grew by 61,000, ending with about 230,000 customers. On a worldwide basis, they added 415,000 customers in the September quarter, short of their target. The shortfall was evenly spread through Europe and the United States, due mostly to timing of marketing programs as reflected by a very strong October where they added over 250,000 subscribers.

NEW 3.0 VERSIONS OF AOL. AOL 3.0 for Windows has been downloaded by 50 percent of their customers and is generating over 60 percent of their traffic. The interface won PC Magazine's Editor's Choice award for the best consumer/Internet online service. The integrated browser, personalization features, programming and navigation coupled with the investments in infrastructure and customer care are paying off. Consistently through the quarter and continuing through October, they saw steady improvements in customer retention. The trend continued from the third quarter and continues. As they exited summer and more customers came on the 3.0 version, usage increased. Improvements in customer satisfaction have led to lower churn and greater usage.

CUSTOMER SUPPORT GROWTH. The company invested in its customer support call center operations. During the quarter, the company added 135 support staff bringing the total number to about 3,200. In addition, they have built a dedicated group of representatives who are trained in reselling AOL to those who call up to cancel. They also created a member loyalty lab, taking advantage of their large customer base and the intelligence they gather to integrate design wins up front in the product planning process, ensuring innovation and maintaining leadership position in meeting changing needs.

NETWORK BUILD-OUT. The company continued to build out its data network in order to ensure they could meet future demand. During the quarter they expanded AOLNet, their TCP-IP network, by roughly 25,000 and their network handled almost 70 percent of their total traffic. By this time next year, they expect over 85 percent of their traffic will be handled using AOLNet. This is important as AOLNet is a flat-cost network and incremental hours cost the company very little, allowing them to fund the acceleration of high-margin revenue streams and the new non-metered pricing plan. America Online believes that will this network and the large customer base over which they can spread usage and quickly-growing revenues, they are uniquely positioned to grow profitably.

GROSS MARGINS. Gross margins were 46.2 percent, up over 6 percent from last year and down 0.35 percent from last quarter. America Online introduced $20/20 pricing effective July 1, 1996, and absorbed the cost of more than three million downloads of AOL 3.0. All of these costs were absorbed during the quarter and they were all offset by efficiencies in the network. During the quarter, the cost per hour was about 15 percent lower than last quarter. This is being driven by the ongoing transition of managing traffic on the company's lower cost network. About 69 percent of all traffic was on AOLNet versus 61 percent last quarter.

MARKETING SPEND. Marketing as a percentage of revenue was 21.9 percent, up 1.9 percent from last quarter and up 3.2 percent from last year. The company spent $130 million on acquisition marketing and the cost per registration was about $70. Many of the customer acquisition programs were realized in October, their largest month since the seasonally strong month of February. Any analysis in terms of cost per registration or cost per net adds, which some people do and they believe is mathematically flawed, needs to take into consideration this timing dynamic. During the quarter, America Online added about 40 people to their marketing staff. The company wrote-off the deferred subscriber acquisition costs at the end of September of $385 million due to a change in accounting. The reason for this shift is that the company has no experience with non-metered pricing plans and the accounting standard for capitalization requires operating experience.

OTHER OPERATING EXPENSES. Product development was flat when measured against last quarter and up about 0.68 percent to 5.52 percent from last year. During the September quarter, the company added 49 development staff excluding 100 staff added as a result of acquiring the ImagiNation Network. General and administrative (G&A) were 0.67 percent lower compared to June and down 0.19 percent compared to September 1995. In absolute dollar terms, G&A was down $650,000 due mostly to a one-time severance charge in June. Other income increased $8.1 million versus June, due primarily to the $8 million charge the company took in June relating to the settlement of the class action suit.

BALANCE SHEET. The most significant change is that there is no deferred subscriber acquisition cost. Cash declined $27 million while receivables increased $10 million, for a net change of $17 million. The increase in receivables is due to amounts the company has advanced for leasing and building improvements. Deferred tax losses were reduced to off-set the $385 million write-off. Instead of deferring expenses now, they will be deferring revenues when people pre-pay their fees. The company expects lower receivables, higher deferred revenues and acceleration of cash flow. The company is providing a 10 percent and 25 percent for a one or two year paid in advance subscription, which they expect will generate substantial cash flows over the next couple of quarters.

AUTOMATIC SWITCH TO $19.95. The company has received a large volume of calls requesting acceleration of the $19.95 price point and very few requesting the $4.95 level. The company decided to automatically switch people to the $19.95 price point because they were trying to have the least number of customers call in to not tax the phone capacity.

PARTNER REACTION. America Online has received a positive reaction from its partners and content providers. Many of these partners have been building complementary Web sites that would have been run off of advertising and transaction fees alone. A number of proposals to work more with AOL have come up in the past few days since the price change in recognition that AOL could gain market share from this move.

LOOKING FORWARD. The company expects to be cash flow positive in the March quarter and they expect to generate $70 million between the March and June quarters in positive cash flow. This excludes any prepaid one and two year subscriptions. Including paid up subscriptions, the expectation is that the cash flow will be north of $150 million.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.