AOL's Got Earnings
...and You've Got Earnings if you own it

by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Oct. 27, 1998) -- Everybody's favorite electronic mailman, America Online, reported first quarter 1999 (woah, can ya believe it's nearly 1999!?) earnings of $0.26 per share, topping estimates by 13%, or three cents a share. The company's cash flow from operations improved 65%, to $134 million. This compares to $81 million last year. Revenue rose 65% as well, to $858 million.

Young AOL could score its first $1 billion quarter this fiscal year, and if growth rates in the first quarter are an indication, it will by fiscal year's end. AOL added 952,000 new members in the quarter, making it the finest first quarter in the company's history. AOL (not including CompuServe) had 13.5 million members at the end of September, having added 4 million this past year.

Online subscription revenue was $714 million, up 65%, and high-margin advertising and commerce revenue climbed 133% to $102.8 million. Adding this to cost savings, operating margins were the highest in AOL's history, at 13.1%. Marketing expenses were only 12.2% of revenue compared to 18.7% of revenue last year.

I was going to run through all of the numbers, provide revenue run-rates by division and slap on valuation multiples to reaffirm the $150 near-term price target (not that the near-term is very important), but then I decided: what's the point? The quarterly numbers will be outdated a mere three months from now. Irrespective of the first quarter, the largest lesson that AOL teaches -- generalizations aside -- is to invest in what you know and believe in. This stock has been one of the most heavily shorted since I began to follow it in 1994, and one of the most consistently criticized by the media and, earlier, by Wall Street analysts (another one issued a "Strong Buy" on the company today, finally). All the while, throughout the criticisms, more and more people continued to use AOL and the divergence of leadership between it and its competitors (Prodigy and CompuServe) was evident even in 1995.

It's difficult to believe that $10,000 invested in AOL in 1992 is now worth approximately $1 million. But don't slap yourself too hard. Realistically speaking, in 1992 AOL wasn't known by many of us well enough to buy its stock rather than that $10,000 1992 Chevy we bought instead, which now rots in a junkyard -- anyway, don't feel too badly about 1992. But by August of 1994, when the Fool Port bought in, AOL was already shipping on desktops of most leading personal computers and the free AOL disks were beginning to replicate like gremlins (in a few ways). Since the Fool Port bought AOL in 1994, the stock has returned 3,200%, turning the Fool's meager $2,500 investment into $85,000. That's 83,000 bucks in profit on an initial investment that now pales in size comparatively so as to become almost meaningless. Eighty-three thousand bucks, or probably a dollar for every negative comment made on AOL since 1994.

So what, though. That's history. What about the future? AOL faces plenty of competition but has a definite niche that the competition hasn't yet matched. It's an easy-to-use single package that arrives on your desktop with little friendly icons that show you how to use everything. It's still the Internet on training wheels, and that's what many people want, quite frankly. When you visit a large city like New York, you typically want to visit your few favorite sections of the city, not the entire city. AOL will likely continue to focus on making its part of the "online world," or city, more friendly, easier to use, well-lit, and generally safe for families.

Is it too late to buy your small piece of the company? AOL, like the Internet itself, is in inning two of at least nine innings (innings that stretch beyond our lifetimes, at least as far as the Internet itself is concerned). That's not a guarantee that AOL will win the game flat-out, but it's off to a very winning start and the more members it gains, the more its lead grows.

Based on revenue streams that are on track, the stock could see $150 this fiscal year (and that's very near-term -- think longer) if it trades on traditional valuation measures that we've outlined in the past. Actually, not $150. Make that $75. Because AOL also announced a stock split of 2-for-1, due around November 17th.

Let us anticipate some of the questions often asked by new investors, ranging from, "Should I buy before or after the split?" to "Do I risk losing any of my shares when they split?" In fact, it's very easy to anticipate these questions with The Fool FAQ, one of whose articles addresses "Stock Splits" directly. If you're new to stock splits, click that blue link and start there. (And note also the many other subjects that have articles, Frequently Asked Questions that have become Foolishly Answered Questions. Yet another fine resource brought to you by our Nobel-aspiring scientists at Fool Labs.)

We'll have America Online's conference call summary for you soon. The replay can be heard at 1-888-554-3823 for 48 hours. The replay can also be heard online at: http://webevents.broadcast.com/aol/q199earnings/.

The first quarter press release can be read by clicking here. Also, to discuss earnings, please visit the AOL message board.

For now, Fool on!

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Bookmark Live Fool Port Quotes

10/27/98 Close

Stock Change Bid ---------------- AMZN -5 1/8 116.31 AOL +1 1/8 120.88 T - 13/16 63.44 DJT - 7/16 5.00 DD - 5/8 59.56 XON -1 5/8 69.56 INVX + 7/8 13.81 IP -1 1/16 44.69 IOM + 3/16 5.69 KLAC -1 1/2 33.00 LU - 1/2 79.50 SBUX + 3/16 38.81 COMS -1 15/16 32.69 TDFX - 1/8 10.88
Day Month Year History Annualized FOOL -1.01% 6.55% 51.96% 409.98% 47.02% S&P: -0.65% 4.75% 9.78% 132.41% 22.08% NASDAQ: -0.43% 1.40% 9.38% 138.50% 22.83% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 120.88 3224.00% 9/9/97 580 Amazon.com 19.11 116.31 508.62% 5/17/95 1960 Iomega Cor 1.28 5.69 344.19% 10/1/96 84 LucentTech 23.81 79.50 233.92% 8/12/96 130 AT&T 39.58 63.44 60.29% 4/30/97 -1170*Trump* 8.47 5.00 40.96% 2/20/98 200 Exxon 64.09 69.56 8.54% 2/20/98 215 DuPont 59.83 59.56 -0.45% 2/20/98 270 Int'l Pape 47.69 44.69 -6.30% 8/24/95 130 KLA-Tencor 44.71 33.00 -26.19% 8/13/96 250 3Com Corp. 46.86 32.69 -30.25% 7/2/98 235 Starbucks 55.91 38.81 -30.58% 6/26/97 325 Innovex 27.71 13.81 -50.15% 1/8/98 425 3Dfx 25.67 10.88 -57.63% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 85821.25 $83239.38 9/9/97 580 Amazon.com 11084.24 67461.25 $56377.01 5/17/95 1960 Iomega Cor 2509.60 11147.50 $8637.90 10/1/96 84 LucentTech 1999.88 6678.00 $4678.12 4/30/97 -1170*Trump* -9908.50 -5850.00 $4058.50 8/12/96 130 AT&T 5145.11 8246.88 $3101.77 2/20/98 200 Exxon 12818.00 13912.50 $1094.50 2/20/98 215 DuPont 12864.25 12805.94 -$58.31 2/20/98 270 Int'l Pape 12876.75 12065.63 -$811.13 8/24/95 130 KLA-Tencor 5812.49 4290.00 -$1522.49 8/13/96 250 3Com Corp. 11715.99 8171.88 -$3544.12 7/2/98 235 Starbucks 13138.63 9120.94 -$4017.69 6/26/97 325 Innovex 9005.62 4489.06 -$4516.56 1/8/98 425 3Dfx 10908.63 4621.88 -$6286.75 CASH $12005.75 TOTAL $254988.44

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