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AOL Q1
Earnings
(FOOL GLOBAL WIRE) ALEXANDRIA, VA (Nov. 6, 1997) /FOOLWIRE/ -- AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> surpassed consensus expectations when it reported fiscal first quarter earnings after the bell, posting a $0.16 EPS gain versus estimates of $0.12 EPS. However, $0.04 per share of this earnings gain relates to some complicated accounting vis a vis the relationship with EXCITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %>. Member retention remains strong and the cost structure improved dramatically, but high-margin "other revenue" growth sputtered out relative to the prior quarter. WHAT HAPPENED? Revenues in America Online's fiscal first quarter increased 49% to a record $521.6 million, up 8.2% from last quarter. This revenue increase was in line with the sequential increase of 8.3% in subscribers to 9.4 million, within a hair of the 10 million year-end target. Subscriber revenues grew 12.6% from the prior quarter while other revenues actually declined slightly, down a total of $2.3 million. Although a slight negative, this is mostly due to ANS Communications, a subsidiary soon to be shipped off to WORLDCOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %> if all goes well. America Online is producing $280 million in annualized revenues and booking more in online ad sales than CNET <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNWK)") else Response.Write("(Nasdaq: CNWK)") end if %>, YAHOO! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>, EXCITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %>, and LYCOS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> combined. High-profile agreements with a number of Web-based retailers have done a lot to create growth in the merchandise part of "other revenues." Overall, the company has $2.1 billion in annualized revenues. On the cost side, the performance was nothing short of marvelous. Gross margins improved a solid 0.5% quarter-over-quarter. The real surprises were in marketing and general and administrative (G&A). Marketing went down to 18.75% of sales versus 20.41% last quarter and 28.65% last year, below the 20.0% target. G&A fell to 10.41% of sales versus 11.96% in the first quarter. Although product development expenses notched up slightly before a gain from the restructuring charge, operating margins more than doubled to 4.8% versus 2.0% last quarter. It is this increase in margins that translated into 16 cents per share of earnings. Earnings per share growth was also helped by the fact that the company no longer treats options like Halloween candy to be dispensed to anyone who walks by the corporate office. WHAT DOES IT MEAN? With subscriber growth intact, costs down, and revenues still growing at an impressive 49% year-over-year rate, America Online appears to finally be getting enough leverage on its fixed costs to generate substantial cash. With an operating earnings run-rate of $0.54 per share going into the year, estimates of $0.89 EPS seem just about right at this point. Although still expensive relative to this number, the question remains as to how much more leverage AOL can get. Are the terminal operating margins 5.0%? 10.0%? 20.0%? Although a subscriber-based valuation back in July gave a valuation of around $87 1/2 per share, as the company actually brings profits to the bottom line the valuation dynamic will begin to change. Investors are urged to build out a sketch of what kind of operating margins the company can do on what kind of revenues. This is where the future value will come from. Check out the AOL Message Board
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