Online advertising slowdown? What online advertising slowdown?
, the nation's largest online service and the prospective merger partner of
, asked Wall Street in a conference call following the release of earnings for the first quarter ended Sept. 30.
While Internet companies from
on down have been cautious at best about the near-term online advertising market -- and been punished for their frankness -- AOL executives repeatedly hammered in the message that the company, which slightly exceeded expectations for advertising and e-commerce growth in the quarter, is suffering from no such slowdown.
"I don't see it, and I don't buy it," said President Bob Pittman.
Chief Financial Officer Mike Kelly chimed in with the same thoughts. "AOL's advertising and commerce business is very healthy, and I can't say that strongly enough," Kelly said.
In fact, the pain suffered by other Internet companies is good news for AOL, insisted Chairman Steve Case. "The current advertising environment benefits us, because it will drive a flight quality," he said.
Ah, the Flight to Quality
Investors, who pushed AOL's shares down over the past week, returned to the fold on Thursday. After an early selloff, AOL shares rallied $3.31, or 7.6%, to close at $46.91. By the end of the earnings call, the company's shares had risen another $2.84 to $49.75 in after-hours trading.
AOL narrowly beat expectations for its high-margin, fast-growing segment including ad sales, merchant e-commerce deals and merchandise sales. Revenue for these operations amounted to $649 million -- about a third of AOL's total revenue -- up 80% from a year ago and ahead of expectations of about $640 million.
AOL reported earnings per share, excluding one-time items, of $350 million, or 14 cents per diluted share, compared to $182 million, or 7 cents per share, a year earlier. The consensus of analysts surveyed by
called for EPS of 13 cents. Revenue was $1.975 billion, matching expectations.
Analysts on the call expressed some concern about the size of AOL's backlog of advertising and e-commerce business, which, at $3 billion, remained uncharacteristically steady from the close of the prior quarter. But Pittman said the size of the backlog was under AOL's control, with the company shortening the average length of deals so that as it made more of them with mainstream companies, it could come back to the table and raise rates more often.
Among other statistics, the growth of the subscriber base for the flagship AOL service -- up 1.4 million to more than 24.6 million -- surpassed analysts' expectations for the quarter. Kelly pointed out that traditionally, the quarters ending in December and March are even stronger for the company.
As examples of benefits of its scale, AOL trumpeted that its per-hour narrowband connection expenses had declined 18% from last year, and its marketing expenses had declined as well.
AOL also reported glowing results of preliminary tests it had done of marketing Time Warner magazines and movies online.
About the only bad news in AOL's results was in its "enterprise solutions" operation, the former
. One year ago, on the eve of concerns about the Y2K bug -- remember the Y2K bug? -- revenue for the enterprise solutions operation was $122 million. This fall, it was $120 million. But, focusing on the future with Time Warner as opposed to the past with Netscape, no analysts questioned management about the operation.