FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

CompuServe Corportion   <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSRV)") else Response.Write("(Nasdaq: CSRV)") end if %>
5000 Arlington Centre Boulevard
Columbus, OH 43220
(614) 457-8600
http://world.compuserve.com

UNION CITY, CA (February 24, 1997)/FOOLWIRE/ --- CompuServe Corporation reported third quarter results on February 20th. Earlier the same week, CompuServe's CEO resigned. CompuServe has hired an outside firm to conduct the search for a new CEO. They are looking for a business person who has strong marketing, financial, and tactical skills. On the technical side, the person should also be knowledgable about data communicaitons and information content and services. The candidates have to be strategic thinkers and also have strong leadership skills. They just started the search and can't predict how long it will take. They will move as aggressively and quickly as they can. They want to get the right candidate, the right individual in this job because it is a very important job. They don't know how long it will take.

THIRD QUARTER RESULTS. The results this year are devoid of any special or non-recurring charges for the first time and are also consistent with their previously announced objective to improve profitability and the utilization of the funds made available to them through last Spring's IPO. Revenues for the quarter were up 4% versus a year ago, but down 2% sequentially.

NETWORK SERVICES REVENUES. Network services had another good quarter with revenues up 27% from a year ago and up 3% sequentially. The increase in network services revenues was largely attributable to an increase in network customers and continued growth in services to existing customers. For the quarter they added a net 90 new corporate customers. Previous growth in network services has been about 35%. There was some seasonality involved in the slower growth rate with both Christmas and New Year falling in the middle of the week. They are not concerned about the growth rate because they continue to sign customers at a record pace. Their net customer sign-up is up over 40% over this time last year and they are also continuing to grow significantly faster than the market. The market is growing at around a 20% rate and, even at a 27% growth rate, they are eclipsing that growth fairly easily. There was a client in Europe that was basically an Internet service provider, high usage/low margin, that discontinued service with CompuServe. They believe that had an influence on revenue for the quarter. They would hope that the 90 they signed up for the quarter would offset that loss. The price environment has always been rather competitive. In some cases where they are competing against some of the 800-number players they do very well. But, even in the new price competition that has come out recently from other players they do very well, not only because they are able to play there, but because they have much more of a focus on value-added services, they are not just a pipe where data goes in and comes out, they add a lot of customer preference equipment and integration working in the customer's application on both ends, which is the type of value that most of the other players just can't do.

INTERACTIVE SERVICES REVENUES. Interactive services revenues were down 2% from the year-ago levels and down 4% sequentially with the discontinuation of WOW! accounting for most of the decline. With respect to interactive services, the decrease versus a year ago reflects a 10% decline in per member revenue partially offset by a 2% increase in CompuServe hosted membership, with a nearly 50% increase in European membership overcoming an 8% decline for the rest of the world. The majority of the decline in rest of the world membership is attributable to a softening of their business in Canada. They are losing some members to ISPs and that is a phenomenon they have also seen domestically to some extent and they have made the decision not to meet the unlimited flat pricing. So, they expected a slight fall-off since some members were simply using the services to surf the Web.

REVENUE PER MEMBER. As compared with the preceeding quarter, an increase in revenue per member from $15.06 to $15.22 wasn't enough to overcome a 5% decline in CompuServe hosted membership with a 9% decline in US membership partially offset by continued growth in Europe which was up 7% versus the preceeding quarter. The improvement in revenue per member is a significant factor, contributing in part to the improving margin this quarter.

COST OF REVENUES/MARGINS. Cost of revenues, while up from a year ago, were down from the two preceeding quarters. As a percentage of revenues, these costs also declined to 64% in the third quarter versus 67% and 68% respectively in each of the last two quarters, but remained up from the 52% of a year ago. The 4% improvement over the previous quarter was attributable to the increase in per member revenues in combination with lower cost data lines, customer service, and bad debts. The lowering of these costs was consistent with their discussion during the last quarterly conference call. They expect the margin improvement to continue into the fourth quarter. As compared to a year ago, the 12% decline in margin is largely attributable to lower per member revenues and higher data line costs associated with the build-out and upgrading of their European network.

NETWORK TRAFFIC. Total network traffic across all commercial, Internet, and CompuServe information services customers decline a couple percentage points from the preceeding quarter, but were up 16% versus a year ago, driven by the SPRYnet Internet access service which they said shouldn't surprise them given that PC Magazine recently named it the Best Internet Service Provider in the US.

MARKETING EXPENSES. Marketing expense, as reported in the third quarter, includes a net $4.1 million amortization of previously capitalized and deferred costs. In other words, cash-based marketing expense in the quarter was $43.2 million or a little over 20% of revenues, down from 42% a year ago and 26% sequentially. The lower marketing costs reflect the discontinuation of WOW! as well as the back-to-basics strategy implementation, with marketing expenditures more in line with those in the first half of last year. In Europe, they continued to spend behind the growth of the subscriber base, which increased in the third quarter at an annualized rate of 26%.

GENERAL & ADMINISTRATIVE EXPENSES. G&A expenses as a percentage of revenues rose slightly in the third quarter to 5.8% or 5.2% of revenues on a year-to-date basis. Depreciation and amortization moved up almost 1% to 13.9% of revenues in the quarter compared to 13% in the preceeding quarter and 9.5% a year ago. This rising cost reflects the continued investment in upgrading the network infrastructure and the migration to the 32-bit platform for the CompuServe interactive service. Equipment leasing costs represent the recently negotiated financing arrangements for portions of their network switching equipment and client servers.

PRODUCT DEVELOPMENT EXPENSE. Product development expense increased in absolute and relative terms as the effort behind their migration to the Web-based information service intensifies. During the quarter they successfully moved the first proprietary forums to the Microsoft Commercial Internet System platform. The next major milestone which they will vaguely target for the middle to late part of the year would be the rollout of what they call internally CSI '97, which is the creation of a new community structure of their current form-based activity on the open theaters of the Internet and available through a browser. They have plans as they move more of their content to their Web servers to be able to offer premium channels on top of the existing base product offering and, as the encryption and security technology settle down, they anticipate early in the next calendar year they will be able to make premium channel offerings. They have not said which vertical markets or industries they will target yet. A good example of what some of these vertical applications might look like would be repackaging other high-value services like Lexis/Nexis into hourly dollar bites, etc. They will also take standalone products as they do today on the existing service, like an electronic news clipping service or Dun and Bradstreet or a database of newspapers and magazines for archival news retrieval and package those for specific industries as well.

EARNINGS, CASH FLOW, LIQUIDITY. For the quarter the net loss of $14.2 million or $0.15 per share was in line with most of the published estimates for the quarter, despite a shortfall of the revenue projections. This reflects, in part, the early results of their cost-reduction initiatives, primarily in the online services business and staff support areas. For example, there are nearly 500 fewer employees on the payroll today than at the start of the fiscal year. That is nearly a 14% reduction in total headcount. The savings are real and the results are beginning to show. EBITDA (a surrogate for operating cash flow) approached $10 million for the quarter and represented the first positive figure in 5 quarters. These results, in combination with third quarter capital expenditures of about $11 million, further reduced the cash burn rate from over $100 million in the first quarter and $60 million in the second quarter, to less than $10 million in the quarter just ended. Total cash, cash equivalents, and investments were $176 million at quarter end.

STRATEGY TO RETURN TO PROFITABILITY. As they indicated in their press release, although their third quarter results show improvement over the second quarter they are clearly not acceptable. Their number one priority as a company will be to stabilize earnings and return to profitability as quickly as possible. To accomplish those objectives they are going to pursue three parallel efforts. First, they will continue to invest in their commercial networking business. Network services has been a very strong performer within CompuServe. It has been growing in excess of 20% for some time and that growth is continuing. They will continue to expand their offerings and services in this important area. Second, they will continue to refocus their flagship service on the business, technical, and professional user. They will do this in North America and Europe, although in Europe they are also maintaining their focus on the consumer. In all cases, they will invest in growth only in areas where they are convinced that growth will be profitable. Third, they will continue to reduce costs and realign their structure to exploit the company's core strengths. For a number of years, CompuServe enjoyed very rapid growth with limited competition. That road has changed and they must change with it. They will re-evaluate current activities to ensure that going forward everything they do supports their strategic goals. Those are their priorities. Once they feel they have accomplished a return to profitability to where they can move forward with their strategy under a new CEO, they will go forward with their separation from H&R Block.

ONLINE SERVICES STRATEGY. At the close of the second quarter they told analysts about their back-to-basics strategy and their commitment to expanding their global leadership position in the business sector while continuing to serve the more profitable segments of the upscale consumer market. They also told people that they were no longer interested in losing money in the undifferentiated mass-consumer market and, as a result, withdrew their WOW! family service from that market three weeks ago. Their mission going forward is to deliver information, communications, and commerce to a demanding business, technical, and professional membership at work, at home, and at play.

ADVERTISING AND TRANSACTION REVENUE STREAM. The opportunity as they move more of their information to a Web-based environment, it enables them to present advertising and transaction opportunities to virtually anyone who is in the Internet space. No longer must they run on CompuServe's network and no longer must they use CompuServe's proprietary client software. So, the universe of opportunity expands dramatically. They have built the relationships and the internal team that can now exploit the very large audience they have to deliver today to their commerce and advertising partners and they will seek new relationships. They now have an end-to-end solution in place for both the acquisition of advertising, the serving of advertising, the tracking of the audience metrics, and the various ways that they will price and store one's advertising availability. They have a relationship now with a sales representative firm to move their message out across the country and they have a relationship in place with ECI and the Electronic Classifieds Group on the West Coast to create a new personals and classifieds business.

SMALL OFFICE/HOME OFFICE MARKET. They mentioned the opportunities in the small office/home office (SOHO) marketplace and their desire to introduce business products for this market early in the calendar year. Since those announcements, they have received results back from several research projects that were underway at the time and these findings have enabled them to further refine their strategy and roll out products more aggressively. For example, with research from Odyssey Partners, they found that SO and HO are two distinct markets when it comes to online services given the number of PCs installed per location. For instance, there are 4 million small office companies which they define as companies with 100 or fewer employees with 63 million PCs. In addition, there are 5 million home office residences with 5 million PCs where usage is generally restricted to a single high-end user working at home. This home office user is well know to CompuServe because, in many respects, it is the market they are serving today. From their membership profiling studies, they know that already 43% of CSI members work primarily from home or have a part-time home-based business and half of the membership spends at least 3/4 of their time on CompuServe for business related activities.

BUSINESS CONTENT NOW AGGREGATED UNDER ONE SET OF MENUS. These members, who tend to be more loyal and less price elastic, already use CompuServe for business and on January 10th, CompuServe made it easier for them to do so by aggregating all business content on the service under one set of menus. The "Go Business" command takes the place of CompuServe for business and is available today to all CSI members and is included as part of the base subscription fee. Their new architecture guides members to the best business applications and content, including the latest business news, financial and general management forums, marketing and sales information, and their computing support communities.

AGGREGATING QUALITY CONTENT IS A KEY DIFFERENTIATOR. A key differentiating factor for their members is the value they find in the quality and content and communities that CompuServe aggregates on their behalf. CompuServe draws a distinction between those who need reliable Internet online access and those who merely want it, those who are pursuing information and those who are pursuing entertainment, those for whom an online Internet service needs to be a tool and not a toy, those who look at the value equation first from the perspective of maximizing utility rather than simply cutting price. As they mentioned in their press release, the March issue of NetGuide Magazine carries an in-depth product review of the major online service providers and their relevance for business purposes. The wrap-up concludes, "CompuServe is the winning OSP for business. The vast range and excellent quality of CSI Business Services puts it miles ahead of any other OSP in this area."

RECAP OF SOME RECENT NETWORK SERVICES WINS. They have continued to see strong success in their network services business where they offer value-added wide area network solutions to the corporate marketplace. Included in 90 new customers this quarter are two they believe are good examples of the kinds of customer they are serving and the services they provide to them. Due to their contractual relationships with these customers, CompuServe withheld the company names, but both are very well known in the Fortune 500 and this information, it was felt, would give a good sense for the business.

MAJOR AUTO COMPANY EXAMPLE. The first example is a major auto company based in Detroit. They have some key application needs. The first is an application for their credit department. This requires data communication between their credit headquarters and the country-wide network of dealerships for processing and approving loan and lease applications for both new and used car sales. Second, as with many of CompuServe's customers, this company has both mainframe and LAN-based client/server types of applications. As dependency on these applications grew, the company needed to provide access to them for travelling executives. In this case, especially for international travel. From a technical standpoint, the required solution was for an intranet. Since that is the most over-used term in the industry right now, CompuServe wanted to define what they mean by it in this case. It is the use of technology developed for the Internet, but in a secure, private, network application. CompuServe network services has been providing various forms of these virtual private networks for their customers for over 15 years. This level of application with this type of company involves a multi-year contract worth in excess of $1 million. They competed for this business with two other exchange carriers, namely MCI and AT&T. They won this business by not only having the right combination of products and services at a competitive price, but they were selected in particular because of the global range of their network, which is available from over 87 countries, and the data communications expertise from their local support team, which was able to work with the customer and design the best solution for their specific needs.

A TOP 5 PROPERTY/CASUALTY INSURER COMPANY EXAMPLE. The second customer example is one of the top 5 property/casualty insurers in the US. This company needs to establish a communications system allowing sales agents, claims adjusters, and remote executives to process policies, claims, and management reports. The solution CompuServe is providing to this customer is similar to the one for the automotive customer just described, but it includes the added complexity of having to integrate into two different LAN environments. In this case it happens to be platforms provided by both Microsoft and IBM, as well as into the IBM mainframe environment. This is also a multi-year, multi-million dollar deal. Their competitors were AT&T and IBM. The customer told CompuServe that they won again because of the account management and data expertise of their local support team plus, in this case, CompuServe's corporate certification labs which configure and test specific solutions for their customers, and the quality and cost competitiveness of their service.

* 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.