In fiscal third quarter results released after market close Tuesday, America Online Inc. posted net income of $117m (£71.34m), or 11 cents a share, including neither one-time events nor results from the recently acquired operations of Netscape Communications. The results were in line with Wall Street's "whisper" estimates and ahead of First Call's consensus forecast, which predicted earnings of 9 cents a share.
Excluding one-time gains but including Netscape, AOL saw earnings of $109m, or 9 cents a share. Including non-recurring events and Netscape, AOL earned $420m, or 33 cents a share, compared to a pro forma loss of $78m, or 8 cents a share, in the third quarter of 1998. "We are very pleased with our results this quarter," said Steve Case, AOL chairman and CEO. "They demonstrate that we can deliver strong, consistent growth in profits while taking advantage of opportunities to improve our competitive position."
Third quarter revenue increased to $1.3bn, a year-over-year pro forma gain of 66 percent. Advertising, commerce and other revenues rose 94 percent over the same period, to $275m. Subscription revenue went up 50 percent to $869m, as the AOL service picked up 1.8 million new users, bringing total membership to 16.9 million. Including Compuserve's 2 million users, America Online's online services have 19 million subscribers. Because of that strong subscriber growth, Merrill Lynch analyst Henry Blodget wasn't expecting AOL to beat the First Call forecast by wide margin. "Strong net-subscriber quarters like this one actually have a depressing effect on gross margin and the bottom line, because the first month is free to the consumer but expensive to AOL," Blodget wrote in a preview of the earnings report. Still, AOL managed to increase third quarter operating margins to 16 percent from 9 percent a year earlier, not including Netscape.
Advertising and e-commerce sales generated $210m, more than double from the third quarter of fiscal 1998. The consolidated backlog of advertising and commerce grew to about $1.3bn at the end of March, from $804m at the end of the December. In retreating 7 3/8 to 154 5/8 ahead of the quarterly report, AOL led a broad technology slide on Tuesday. But investment firms remain mostly bullish on the stock. Of 33 analysts polled by Zack's Investment Research in the US, 22 have "strong buy" advisories on AOL, 10 rate it a "moderate buy", and one maintains the equivalent of a "hold" rating.