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AOL Posts Profit a Year After Crisis

By Rajiv Chandrasekaran
Washington Post Staff Writer
Friday, November 7, 1997; Page D01

America Online Inc. yesterday capped one of the technology industry's most remarkable corporate turnarounds, posting its first quarterly profit since a busy-signal crisis shook the pioneering company last year.

The Dulles-based online service also announced that its membership has grown to 9.4 million people. That new expansion gives it an unprecedented heft in cyberspace to attract advertising and business partners.

A year ago, AOL was on its way to the trauma center. The service had hemorrhaged more than $353 million in the quarter ended in September a year ago. Customers were getting busy signals when they tried to connect, and often they were defecting in response.

The company's stock had fallen to record lows. Several industry observers predicted AOL would shrink to a bit player in the online world.

A chastened AOL embarked on a do-or-die rehabilitation effort. The company spent $350 million to improve its network. It revised its business model to focus on revenue from advertising and marketing deals.

Yesterday, industry observers said, AOL showed that those strategies are working. The results demonstrated that it can not only attract millions of people to its homey electronic community but it also can do so profitably. The company's performance, some analysts said, could bolster investor confidence in other Internet-related businesses.

"This has been an amazing turnaround," said Ulric Weil, an analyst with investment bank Friedman, Billings, Ramsey & Co. in Arlington. "They're now king of the hill."

The past three months have been good to AOL. In September, the company announced a deal to sell its data-network division to telephone company WorldCom Inc. in exchange for $175 million and all 2.6 million customers of its former main rival, CompuServe Inc. AOL has announced an expansion into Australia and sold advertising space on the service worth $80 million.

AOL's stock price has climbed from $24 on Nov. 7 of last year to $79.37 1/2 yesterday, a 231 percent increase.

"There's no question we've had a number of challenges to address," AOL's chairman and chief executive, Steve Case, said in a interview yesterday. "But we've stepped up to the plate and addressed them."

The company said yesterday that it achieved a $19.2 million profit on record sales of $521.6 million in the quarter that ended Sept. 30. In the fiscal year ended in June, AOL reported a loss of more than $500 million, after it abandoned a controversial accounting practice.

Yesterday's 16-cent-a-share results, which included 2 cents related to the sale of AOL's stake in Internet search firm Excite Inc., were slightly above the consensus expectations of Wall Street financial analysts.

AOL posted a $10.9 million operating profit for the quarter ended June 30, but it posted a $11.8 million net loss for the period after the Securities and Exchange Commission asked the company to revise the way it calculated its results.

As a result, AOL said, it took a far more conservative approach in the past quarter in determining its profitability. Of the $80 million in new advertising deals it signed, only $5 million was counted as revenue during the quarter, Case said.

"We now feel it's more appropriate to err of the side of conservatism," Case said. He noted that the company has a revenue backlog of about $224 million.

This new approach caused the company's revenue from sources other than subscriber fees to come in at $88 million, well below most analysts' forecasts of about $105 million. "It's not a big worry" because AOL got a commitment for the revenue, said Jamie Kiggen of Cowen & Co. in Boston. "They just counted less of it in the quarter."

Thus far this year, AOL has signed marketing and advertising deals with companies that include Internet bookseller Amazon.com, 1-800-Flowers, Preview Travel and long-distance firm Tel-Save International. Those multi-year deals, which call for AOL to display ads on different parts of the service and offer the companies prime space in the service's electronic storefronts, have amounted to more than $270 million.

Though AOL has angered some subscribers by hitting them with ads that "pop up" on screens during the sign-on process, the net effect for the service seems positive. Yesterday it signed yet another marketing deal, a three-year, $16 million agreement with voice-mail and fax company JFax Communications Inc.

Revenue from subscriber fees – the major share of AOL's sales – rose 40 percent, to $434.2 million, from $311.1 million a year ago. The company also gained ground by cutting marketing expenses.

Analysts and industry watchers, however, caution that AOL still faces significant challenges ahead, particularly from Microsoft Corp.'s online service, the Microsoft Network, and Internet-based services aimed at novice users.

"This is an intensely competitive market," Case said at AOL's annual shareholders meeting last week. "Our view is that we'll never get complacent. We'll remain paranoid. You've always got to live on the edge of your seat and never take anything for granted."

© Copyright 1997 The Washington Post Company

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