AOL posts large loss But sales accelerate and network-capacity woes may subside

February 07, 1997|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

America Online Inc. yesterday reported a big loss for the quarter that ended in December, but said membership and advertising sales took off and it has made a deal to solve its world-famous network-capacity problems two months ahead of schedule.

The Dulles, Va.-based online service provider said it lost $154.8 million, or $1.64 a share, compared with a profit of $9.5 million in the same three months of 1995. The December quarter is the second of AOL's fiscal year.

But the loss was exaggerated by a $74 million charge for an October restructuring and a $24 million write-off to pay for the company's settlement over poor service with 36 state attorneys general. Last year's profits also were a mirage; the company avoided reporting a loss only by using an accounting practice it has since dropped.

The deal with the attorneys general headed off consumer-fraud claims stemming from consumers' inability to get through to AOL consistently and use the service they had paid for during December and January. The company was swamped by demand after adopting flat-rate, unlimited-use pricing in December.

In a conference call with analysts, America Online Chief Financial Officer Lennert J. Leader said the settlement charge assumes that only 1 million of the 6 million AOL customers eligible for refunds will go to the trouble of calling the company and demanding them.

Leader said the company believes that the average refund will be $24, about 20 percent more than the AOL's monthly rate for unlimited use of its mix of e-mail service, chat rooms and online news and infotainment.

AOL's quarterly loss on continuing operations works out to 60 cents a share, about 6 cents more than analyst expectations but a number that the company insisted is consistent with what it has told Wall Street since October.

"The instant snapshots were slightly misleading," Miller said. "All of the numbers were roughly as they had indicated. There were no real surprises."

Wall Street did not immediately react to the news, because the company reported its results after the New York Stock Exchange closed.

Optimism from the top

AOL Chairman Steve Case said the results show the company is building its franchise, which he has contended will eventually let AOL grow out of its short-term problems and establish itself as the first computer medium to draw serious amounts of advertising.

"We feel good about our ability to satisfy our 8 million members, that we'll reach 10 million by the end of the year and do so profitably," Case said.

"We believe we have the ratings to convince advertisers that we have to be part of the mix. We are at an early stage of the migration of advertising online, and AOL is well-positioned to be a major beneficiary."

Case said the company has made a short-term deal to lease an extra 50,000 modems to let users contact AOL's network -- enough, he said, to cure the problem by the end of April, rather than by June as the company had promised Jan. 16.

AOL said it will be able to handle 16 million daily online sessions, compared with 10 million in January, thanks to a $350 million network upgrade.

AOL said it soon will have one modem for every 20 subscribers -- meaning 5 percent of AOL's customers can log on at one time -- compared to one modem per 40 customers before. Analysts bearish on AOL have contended that other Internet service companies have one modem per 10 customers.

"They made the decision to stand up and serve the customer well," T. Rowe Price Associates Inc. analyst Lise Buyer said, even though the leases will cost AOL $10 million to $15 million in the first three months of 1997. "AOL has not [previously] erred on the side of the customer."

T. Rowe Price is one of the two major Baltimore-based AOL shareholders. Legg Mason Inc.'s mutual fund arm bought about 1 million shares of AOL late in 1996, said William H. Miller III, who manages Legg Mason Value Trust Inc. Legg Mason owned about 1.3 million shares, or 1.4 percent of AOL, before its buying burst.

Pub Date: 2/07/97

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