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AOL Devotees Find Their Faith Tested

SAN FRANCISCO -- On a rocky day for the stock market, America Online (AOL) provided a singular window into Wall Street's frenetic action.

It initially hung tough, but then swung steeply lower -- as far down as 97 1/2 -- before rebounding to finish at 107 3/8, down 3 5/8. Trading 15.9 million shares, AOL was the most active issue on the

New York Stock Exchange

. Throughout the chaotic session, professionals found their faith in the bellwether Internet stock sternly tested, but few would back down. Analysts reiterated buy ratings, confidence in earning estimates remained firm and buy-side managers dove in when the stock fell below 100.

With AOL showing some tenacity in the face of the bear, Internet devotees reached for some ammunition to argue that the medium continues to grow apace.

AOL's movement was spurred in part by the release of its operating earnings Tuesday after the close. The giant online service reported that in the fiscal fourth quarter ended June 30, it had an operating profit of $57.3 million, or 23 cents per share, four cents above the

First Call

consensus estimate, but a penny shy of the whisper number. In the year-earlier period, AOL's operating profit was $5.6 million, or three cents per share. For the quarter, revenue jumped 67% to $792.3 million from $475.7 million a year earlier.

AOL's earnings, however, were not complete. The company, in an unusual step, didn't report a net figure. It said it expects to report a charge for the settlement of a shareholder suit, as well as write-offs for in-process research and development in connection with its acquisitions of




. It is discussing the charges with the

Securities and Exchange Commission

, which has expressed concerns about companies writing off in-process R&D. The company said its fourth quarter and fiscal year-end 1998 operating results were final.

"It is hard to draw implications for the other Internet companies because AOL was the last to report," said Andrea Williams, an analyst with

Volpe Brown Whelan

, which hasn't performed any underwriting for AOL. "But we are still seeing growth across all of these companies, and we are not seeing companies taking share away from competitors."

"Their numbers have the implication that e-commerce and advertising are really becoming an accepted thing on the Internet," said Ulric Weil, an analyst at

Friedman Billings Ramsey

, which hasn't performed underwriting for AOL. "And on a revenue basis, that should help everybody. America Online leads the way."

It also could lead to increased confidence in other players that have advertising- and e-commerce-based models, such as




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Williams said she expected AOL to have a strong quarter because Yahoo! and Excite had strong quarters. But a good sign of the future growth was the attitude of AOL management on the conference call. "They were very bullish on the call -- more bullish than I've ever heard them," she said.

AOL's subscription growth, however, has slowed. But analysts and fund managers were pleased that there was any growth, considering that the company recently raised its monthly fee to $21.95 from $19.95. AOL reported that it has 12.5 million members, almost four months after passing the 12 million-member mark. It took the company just three months to go from 11 million to 12 million, and only two months to go from 10 million to 11 million.

"The numbers were in line with most people's expectations, plus or minus 100,000 members," said William Schaff, a fund manager at

Bay Isle Financial

, which owns AOL in its

InfoTech 100

fund. "When you are up to 12.5 million, unless you get a lot more PCs at home, the potential starts declining." Scaff said the conference call was filled with talk of a more aggressive overseas growth focused on AOL's


, which has a large international presence.

A host of firms raised estimates. Volpe Brown reiterated its buy rating, noting that AOL stands to be one of the main beneficiaries of consumers coming online. The firm raised fiscal 1999 estimates to $1.03 per share from 90 cents per share on revenue of $3.8 billion and expects AOL to earn $1.53 per share in fiscal 2000 on revenue of $4.8 billion.

BancAmerica Robertson Stephens

analyst Keith Benjamin, whose firm was an AOL underwriter, maintained his strong buy rating and raised his price target to $124 per share. Benjamin boosted his fiscal 1999 estimate to $1.05 per share from 85 cents per share and his fiscal 2000 estimate to $1.50 per share from $1.20 per share.

Prudential Securities

, which has no underwriting connection to AOL, upgraded the stock to buy from hold.

But just like the stock's action Wednesday, not all of analysts' ratings movement was positive.

Everen Securities

, which did not do any underwriting for the company, downgraded AOL to market perform from intermediate-term outperform, based on price. The analyst, Anthony Blenk, maintained a long-term rating at outperform.

For more info on institutional holders of these stocks, as well as financial statements and earnings estimates, please see the

Thomson Company Reports.