Fool Portfolio Report
Wednesday, February 11, 1998
by Debora Tidwell (DebbieT@fool.com)

ALEXANDRIA, VA (Feb. 11, 1998) -- I don't think I have ever written the Fool Portfolio report before (scratching head... trying to remember). Nope. I'm sure now. It's never happened. I was scheduled to be a guest writer once, but Jeff Fischer forgot the market was closed that day. I was all ready to write, and then "Oh well, never mind, we don't need a report after all." It happens. Jeff usually doesn't even realize when it's a weekend day, let alone a holiday.

Well, the market was definitely open today, we're careening toward Valentine Weekend and President's Day next Monday, we're halfway through another week, and AOL beat earnings estimates by a penny last night and announced a 2-for-1 stock split. The stock rocketed ahead $5 1/2 per share or 5.05% today.

Fool HQ is remarkably silent despite all of this great stuff and despite several new content offerings today (some great content will be linked below). About the most exciting thing that happened last night was that TMF NoClue accidentally deleted her TMF screen name. Umm... nah, that one's too easy. The Fool News and Editing team had a great time suggesting temporary TMF names for her, though, and AOL responded quickly to this tragedy, assuring her that she could get her screen name back after a 60-day waiting period.

Speaking of America Online (NYSE: AOL), the company signed an agreement with China Internet Corp. to enter the Hong Kong market, one of Asia's fastest-growing Internet markets and an obvious gateway to potential markets in mainland China. This is the third Pacific Rim presence for AOL, joining Japan and Australia.

Backing up a bit, let's delve into some stuff from AOL's earnings report and analyst conference call.

There were a lot of questions surrounding the price increase and AOL's ability to compete against lower-priced ISPs (Internet Service Providers). The first interesting bit of information is that only 17% of AOL's traffic is going out to the World Wide Web, so a lot of people are using AOL for the AOL content. They also pointed out that while it's true that people can go to other ISPs for flat-rate pricing that is still less than $20 per month, those ISPs do not offer multi-user accounts where each user has a separate email box and do not offer the parental controls for members with kids. To get more than one screen name, you have to pony up another 20 bucks for a separate account. IBM stuck with $19.95 flat-rate pricing but recently put a cap of 100 hours on the rate and a new competing service from Earthlink doesn't offer multi-user accounts unless you pay $29.95. AOL maintains that comparing all the available deals out there, AOL is still offering the best value and a rate structure that people like. Management doesn't expect the churn rate to increase significantly.

Sequentially, revenues of $592 million were up 13.5% over Q1 revenues of $521.6 million and were, again, in line with the sequential increase in subscribers. Advertising/commerce revenues grew 25% sequentially while online service revenues only grew 11.7%. Marketing expenses continued to decline as a percentage of revenue. Last quarter they were 19% of revenue and this quarter dropped to just 16.4% of revenues. On a dollar basis, they were virtually flat compared to last quarter, $96.8 million this quarter versus $97.8 million. This is a good indication of the brand strength in attracting new members as well as a nice kick from the accelerating higher-margin advertising and commerce revenues. They did say that a big chunk of their advertising and commerce revenues renew in the second quarter, so we should not expect a 25% jump next quarter.

Despite that strong performance, gross margins declined due to higher network costs resulting from higher subscriber usage per month. The new price increase is designed to not only offset the higher network costs, but to fund initiatives such as building out their web presence and supporting other access technologies such as consumer appliances and broadband. In addition, the company indicated that CompuServe's network access costs should go down due to the benefits of AOL's volume-based agreements.

For more information on AOL's results, check out the AOL Q2 1998 Conference Call report. Join the discussion on the AOL message board, too.

In other Fool Port news today, 3Dfx (Nasdaq: TDFX) filed a registration statement with the SEC for an IPO of 2.3 million shares of common stock. Two million shares will be issued by the company and the remaining 300,000 shares will come from existing shareholders selling their stock. This will raise somewhere in the neighborhood of $50 million in cash before any fees (using the current stock price).

The company intends to use the net proceeds from the offering for general corporate purposes, including capital expenditures, working capital, expansion of sales and marketing, and research and product development efforts, as well as for financing of accounts receivable and inventories. Okay, so right now there are 12.6 million shares outstanding which will grow to around 15 million shares (give or take, since the underwriters have the ability to buy an additional 345,000 shares to cover over-allotments). So, the share-count increase should dilute the earnings power of the existing shares by almost 20%. Let's hope the company has some outstanding return on invested capital (ROIC) going forward. What do you think? Join other 3Dfxers on the 3Dfx Interactive message board.

Let's end with some cool links that you can check out. First, today is the new edition of the weekly Dueling Fools, with Fool Port stock Amazon.com (Nasdaq: AMZN) the center of debate. Give it a read and cast your vote -- Bull or Bear? Also, tonight there is a live chat on the duel at 9 p.m. Eastern for AOL members. Next, Jeff Fischer provides a Hot Stock Tip in his column for tonight. Read that guy with caution, though!

Finally, courtesy of the Fool's School Principal, here are some other really great links: The Family Fool, Issue 25 is the new issue this week. In addition, there are a lot of great new areas in there including: Find a Home, How to Buy a Car, and Dig Yourself Out of Debt.

Have a good Wednesday night and a nice holiday weekend!

--Debora Tidwell

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TODAY'S NUMBERS

Stock Change Bid ---------------- AMZN --- 63.50 AOL +5 1/2 114.50 T - 1/2 61.69 CHV + 13/16 76.31 DJT - 7/16 10.88 GM + 3/8 63.50 INVX + 9/16 24.31 IOM - 1/16 9.63 KLAC +2 9/16 43.75 LU + 13/16 94.63 MMM +1 7/8 87.88 RTN.A - 1/16 53.19 COMS +1 3/16 33.75 TDFX -1 1/8 24.00 SPY - 3/32 102.16
Day Month Year History FOOL +1.72% 7.64% 1.40% 240.29% S&P: +0.10% 4.05% 5.11% 122.52% NASDAQ: -0.03% 5.51% 8.80% 137.24% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 114.00 1467.47% 5/17/95 1960 Iomega Cor 1.28 9.63 651.71% 10/1/96 42 LucentTech 47.62 94.63 98.72% 9/9/97 290 Amazon.com 38.22 63.50 66.14% 8/12/96 130 AT&T 39.58 61.69 55.86% 8/11/95 125 Chevron 50.28 76.31 51.76% 8/12/96 110 Minn M&M 65.68 87.88 33.80% 8/12/96 280 Gen'l Moto 48.74 63.50 30.28% 1/8/98 115 S&P Depos. 95.91 102.16 6.52% 12/19/97 17 Raytheon 53.21 53.19 -0.04% 8/24/95 130 KLA-Tencor 44.71 43.75 -2.15% 1/8/98 425 3Dfx 25.67 24.00 -6.50% 6/26/97 325 Innovex 27.71 24.31 -12.26% 8/13/96 250 3Com Corp. 46.86 33.75 -27.98% 4/30/97 -1170 *Trump* 8.47 10.88 -28.41% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 40470.00 $37888.13 5/17/95 1960 Iomega Cor 2509.60 18865.00 $16355.40 9/9/97 290 Amazon.com 11084.24 18415.00 $7330.76 8/12/96 280 Gen'l Moto 13647.92 17780.00 $4132.08 8/11/95 125 Chevron 6285.61 9539.06 $3253.45 8/12/96 130 AT&T 5145.11 8019.38 $2874.27 8/12/96 110 Minn M&M 7224.44 9666.25 $2441.81 10/1/96 42 LucentTech 1999.88 3974.25 $1974.37 1/8/98 115 S&P Depos. 11029.25 11747.97 $718.72 12/19/97 17 Raytheon 904.57 904.19 -$0.38 8/24/95 130 KLA-Tencor 5812.49 5687.50 -$124.99 1/8/98 425 3Dfx 10908.63 10200.00 -$708.63 6/26/97 325 Innovex 9005.62 7901.56 -$1104.06 4/30/97 -1170*Trump* -9908.50 -12723.75 -$2815.25 8/13/96 250 3Com Corp. 11715.99 8437.50 -$3278.49 CASH $11259.61 TOTAL $170143.52