With a growing portion of its revenues coming from advertising and commerce, AOL is increasingly exposed to trends in online advertising and e-commerce. But there are trends, and there are trends. In a conference call, AOL's President and COO Bob Pittman directly confronted the well-publicized and much-feared breakdown in the online advertising market. "For this company -- I don't see it and I don't buy it. Business looks great to us."
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AOL's top- and bottom-line numbers are straightforward enough. In the first quarter, the company reported total revenues of $2 billion, a 34% increase from the $1.5 billion in the same quarter last year. After taxes and excluding onetime charges totaling $6 million, that translates into earnings of $350 million, or $0.14 a share, up 92% over the $182 million, or $0.07 a share, reported last year. That beat analyst estimates by one cent.
The AOL service netted a record 1.4 million new subscribers during the quarter, and on a worldwide basis was regularly billing 24.6 million accounts by September 30. That excludes the CompuServe 2000 service, which grew by 165,000 and ended the quarter with 2.8 million paying customers worldwide.
In Europe, the combined AOL and CompuServe services added 290,000 new customers, a first-quarter record, for a total of 3.9 million member accounts. AOL members were using the service an average 58 minutes per day during the first quarter. This is up slightly from the average 55 minutes one year earlier, and flat with the quarter that ended June 30.
Advertising and commerce
While total revenues, earnings, and subscriber numbers get the headlines, the real action comes between the top and bottom lines. True of all companies, it's never been truer for America Online than during the quarter just reported.
For some years, AOL's advertising, commerce, and other non-subscription revenues have been the numbers to watch. They are the fastest-growing segment of the company's business and therefore an increasingly large piece of the pie. This segment also takes on greater strategic importance as Internet access fees continue to decline, paving the way for lower subscription fees, which are in turn one of the keys to the ubiquitous Internet -- what AOL calls "AOL Anywhere."
Thing is, in this season of the online ad crunch, what has been seen as an indication of a diversifying and stabilizing business model and good for the long term, can be seen as a sign of vulnerability. With industrywide concern over the state of online advertising at an all-time high -- and enthusiasm for Internet investing nearing all-time lows -- it's not surprising that the ad/commerce part of AOL's business was the most anticipated and scrutinized aspect of Wednesday's announcement.
Trends and trends
In the third quarter, AOL's advertising and commerce revenues were $649 million, an 80% increase over last year, and about 7% over the pervious quarter. At 33% of total revenues, that leaves the company increasingly exposed to trends in online advertising and e-commerce. But there are trends, and there are trends. Compared to conventional portals and Web services, AOL's advertising revenues are less dependent on the banner-based advertising of other Internet companies -- especially the fledgling dot-coms whose high-profile failures have set the tone in recent months.
In contrast, AOL says it is doing business with a growing number of mainstream companies and brands, and cites Target Stores (NYSE: TGT), Citigroup (NYSE: C), Pizza Hut (NYSE: YUM), the Spanish Broadcasting System, and Office Depot (NYSE: ODP) as deals done in the last quarter. The company also said that its ability to leverage its customer base and multiple brands makes it different from other companies and that this will only be enhanced through its merger with Time Warner.
In yesterday's conference call, America Online President and Chief Operating Officer Bob Pittman directly confronted the well-publicized and much-feared breakdown in the online advertising market. "For this company -- I don't see it and I don't buy it. Business looks great to us."
In Monday's Rule Breaker Portfolio, we'll look more closely at what's got Pittman so psyched.
Your Turn:
Is America Online really as different as the company and some others think, or is it just an overblown, sclerotic dot-com? Share your thoughts on the AOL discussion board.
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