SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): January 19, 2000
AMERICA ONLINE, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 0-19836 54-1322110
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
22000 AOL Way, Dulles, Virginia 20166
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (703) 265-1000
Item 5. Other Events.
On January 19, 2000, America Online, Inc. ("AOL") issued a press
release announcing fiscal year 2000 second quarter results. A copy of the press
release is attached hereto as Exhibit 99.1 and incorporated herein by reference.
In conjunction with this press release, the Company held a telephone conference
with analysts and others. A copy of the scripts used for the call are attached
hereto as Exhibit 99.2 and incorporated herein by reference.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Not Applicable.
(b) Not Applicable.
(c) Exhibits.
99.1 Press Release Dated January 19, 2000 By America Online, Inc.
Announcing Fiscal 2000 Second Quarter Results
99.2 Scripts of Analyst Call on January 19, 2000
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICA ONLINE, INC.
Date: January 20, 2000 By: /s/J. Michael Kelly
J. Michael Kelly
Senior Vice President, Chief Financial
Officer and Assistant Secretary
EXHIBIT INDEX
Exhibit
Number Description
99.1 Press Release Dated January 19, 2000 By America Online, Inc.
Announcing Fiscal 2000 Second Quarter Results
99.2 Scripts of Analyst Call on January 19, 2000
Contacts:
Press:
Jim Whitney
America Online
703-265-1746
Financial Community:
Richard Hanlon
America Online
703-265-1271
AMERICA ONLINE, INC. FY2000 SECOND QUARTER INCOME,
FULLY TAXED AND EXCLUDING ONE-TIME ITEMS,
RISES 160% TO $224 MILLION, OR $0.09 PER SHARE
EBITDA Increases 108% to $453 Million
Reported Earnings Per Share, Including One-Time Items,
Doubles to $0.10 Per Share
Second Quarter Revenues Climb More Than 41% to $1.6 Billion
Advertising, Commerce and Other Revenues
Rise 79% to Record $437 Million
Company Adds Record 1.8 Million AOL Subscribers
DULLES, VA, January 19, 2000 -- America Online, Inc. (NYSE: AOL) today announced
results for the second quarter of fiscal 2000 ended December 31, 1999 -- setting
new records for consolidated revenues, advertising and commerce revenues,
operating income, and quarterly membership growth.
The Company's fully taxed net income totaled $224 million, or $0.09 per diluted
share, excluding one-time items, up from $86 million, or $0.04 per diluted
share, on the same basis in fiscal 1999's second quarter. Operating income for
the quarter, excluding one-time items, climbed more than 155% over the year-ago
quarter to $319 million.
Second quarter revenues rose to $1.6 billion, or 41% over last year's second
quarter, and advertising, commerce and other revenues reached $437 million, 79%
over fiscal 1999's December quarter.
Reported earnings per share, including one-time items, increased to $0.10 per
diluted share on $271 million of net income, up from $0.05 per share on $115
million of net income in last year's second quarter.
The AOL service set a quarterly membership growth record, adding 1.8 million new
members worldwide and finishing the quarter with 20.5 million subscribers. The
CompuServe 2000 service added 440,000 members during the quarter, bringing the
combined CompuServe 2000 and CompuServe Classic membership to 2.5 million, up
from 2.2 million last quarter. And, through its October agreement with Gateway
to operate its custom ISP, America Online ended the quarter with more than
740,000 subscribers of Gateway.net. As a result, the Company finished the
quarter with a total of 23.8 million subscribers in its family of brands.
Extending its standing as Europe's leading multinational Internet provider, AOL
Europe services reached 3.1 million members reflecting record growth in the key
UK and German markets. Media Metrix ranked the AOL services in Europe #1 in
online usage during the quarter - the strongest indicator of customer loyalty
and e-commerce potential. In November, AOL Latin America launched America Online
Brasil, the first local service from the Company's joint venture with the
Cisneros Group of Companies.
The Company's Web-based brands experienced strong growth during the quarter,
with registered users more than doubling over last year to over 135 million. ICQ
added 7.9 million users during the quarter for a total of 53.1 million
registered users, including 17.9 million active users.
Steve Case, Chairman and Chief Executive Officer said: "This is a momentous time
for America Online, as we're announcing the strongest results in our Company's
history. During the quarter, we achieved record growth in revenues, advertising
and commerce, operating income and subscriber growth -- attracting more than 2.1
million new AOL and CompuServe members and millions more Web users to our family
of brands.
Mr. Case added: "With Time Warner, we are taking a bold step to extend our
leadership as the Internet moves into its next wave of explosive growth. Our
combined company will be uniquely equipped to take full advantage of the
Internet's growth to create value for our shareholders, and we are committed to
making the most of this opportunity."
Bob Pittman, President and Chief Operating Officer said: "Our operating
performance this quarter demonstrates that we continue to build enormous value
through the creation and development of powerful interactive brands that deliver
unmatched benefits to consumers. While our flagship AOL service continues to set
subscriber growth and advertising/commerce records in the premium mass market
segment, we're also leading the value segment with CompuServe. Our Web-based
services like ICQ are growing like wildfire and we are dramatically accelerating
our international growth."
Mr. Pittman added: "We are also making significant progress with our AOL
Anywhere strategy, with initiatives like the upcoming roll-out of AOLTV and
mobile devices, and this quarter's acquisition of Tegic Communications and
agreement to acquire MapQuest.com. Our planned merger with Time Warner will help
both to accelerate the growth of the full range of our respective businesses and
position us to create new businesses with major market opportunities."
The Company's final reported earnings of $271 million, or $0.10 per share,
reflect one-time items during the quarter. These comprise a pre-tax gain of $111
million from America Online's investment in Sandpiper Networks, which was
acquired by Digital Island in December, together with a $30 million marketing
expense for the purchase of Gateway.net subscribers and an additional $5 million
in merger expenses associated with the Company's acquisition of Tegic
Communications.
For the six-month period ending December 31, 1999, fully taxed net income,
excluding one-time items, was $408 million and total revenues were $3.1 billion,
compared to fully taxed net income, on a comparable basis, of $136 million and
total revenues of $2.1 billion in the corresponding period of fiscal 1999.
Key operating metrics from the quarter included:
** Subscription Revenues: Quarterly subscription revenues reached nearly $1.1
billion, up 36%, from $786 million during fiscal 1999's corresponding quarter.
** AOL Member Usage: AOL members averaged 57 minutes daily online during the
quarter, an increase of 19%, or 9 minutes, over last year's second quarter.
** Advertising, Commerce and Other Revenues: Revenues from advertising, commerce
and other revenues climbed to $437 million, an increase of 79% from $244 million
during the year-ago quarter.
** Backlog: The Company brought its consolidated backlog of advertising and
commerce revenue to more than $2.4 billion at the end of the quarter.
** Sales and Marketing Expenses: Consolidated sales and marketing expenses,
excluding the one-time item for Gateway.net, declined to 14.3% of revenues,
compared with 17.6% in fiscal 1999's second quarter.
** Operating Income: Operating income, excluding one-time items, jumped 155% to
$319 million, or 19.7% of revenue, up from 10.9% a year ago.
** EBITDA: EBITDA rose to a record $453 million for the quarter, a 108% increase
over a year ago, and EBITDA margins increased to 28%.
** Cash Flow from Operations: Cash flow from operations increased to $324
million, an 82% increase over fiscal 1999's corresponding quarter.
Interactive Services Group Highlights
During the quarter, the Company took a number of steps to ensure continued
strong momentum in:
** AOL subscriber growth through service enhancements and innovative retail and
OEM alliances, including customized ISPs supported by the AOL infrastructure,
with Wal-Mart, Gateway, Circuit City and Blockbuster;
**Shop@AOL through the signing of more than 160 new agreements with leading
retailers to offer their brand-name goods and services, bringing the total
number of merchant partners to more than 300, and contributing to a banner
holiday shopping season;
** Advertising and e-commerce through new partnerships and merchandising
campaigns with companies including Monster.com, Toysrus.com and Stamps.com; and
** AOL Anywhere strategy through the key acquisition of Tegic and planned
acquisition of MapQuest.com, as well as product rollouts, including e-mail over
the Palm(R) Computing platform.
The Company announced several new retailing and OEM relationships, which now
encompasses more than 7,800 outlets around the world. Wal-Mart, the global
leader in retailing, and the Company agreed to create a new co-branded Internet
service provider that will offer convenient, low-cost access to value-conscious
consumers. Wal-Mart also will promote and distribute AOL 5.0 software in the
nearly 2,500 Wal-Mart stores across the US.
The Company also completed agreements with: Gateway, to accelerate distribution
of each company's products and services including DSL access - the AOL service
now is featured and marketed on all Gateway PCs, as well as on Gateway's
successful ISP, Gateway.net; Circuit City, to promote AOL's products and
services in Circuit City's 570 Superstores and 45 mall-based Circuit City
Express stores across the country; and Blockbuster, the world's leading renter
of videos and video games, to promote AOL 5.0 in its 4,000 corporate Blockbuster
locations in the US.
Underscoring the accelerating momentum behind AOL's e-commerce, AOL members
spent $2.5 billion online during the 1999 holiday shopping season -- more than
double last season's $1.2 billion. The average AOL buyer spent a total of $300
online in goods and services during the holiday season -- up 50% from 1998.
Total online spending by AOL members rose to $10 billion in 1999.
The Company extended its advertising and e-commerce leadership through a series
of agreements during the quarter. In a four-year, $100-million partnership,
Monster.com became the exclusive career-search resource across a range of
America Online brands. Other new partners included: a two-year agreement with
Toysrus.com and an expanded alliance with Stamps.com.
The Company advanced its AOL Anywhere strategy through a number of acquisitions
and partnerships during the quarter. The acquisition of Tegic, with its T9 Text
Input software, will help extend AOL interactive services to mobile telephones,
personal digital assistants and MP3 technology. The Company also announced its
planned purchase of MapQuest.com to integrate the company's mapping and
destination services into commerce and content offerings across AOL's family of
brands, and in a variety of mobile devices including smart-phones and
PalmPilots.
With the next-generation AOL 5.0 software and a series of key content
agreements, AOL substantially enhanced its member experience. AOL 5.0 has
experienced the fastest member adoption rate ever, with the next-generation
software now accounting for nearly 60% of all sessions.
Improvements were also made across AOL's content channels. The Personal Finance
Channel was enhanced through agreements with: Intuit, Financial Engines and
TheStreet.com. The Company also upgraded its games offering with an $81-million,
five-year agreement that makes Electronic Arts solely responsible for content on
AOL's Games Channel.
The quarter also saw additional significant developments among other Interactive
Services brands. Through the holiday season, CompuServe 2000, the nation's
leading value brand, extended its rebate program for PCs at CompUSA, and for
select Apple computers, including the popular iMac, at CompUSA and J&R
ComputerWorld stores.
A two-year agreement with Net2Phone provides CompuServe's US members with
Net2Phone Internet telephony calling-card communications services, allowing
users to place calls over Net2Phone's IP network to virtually anywhere in the
world at reduced rates. And today, Netscape and Citibank announced the
introduction of the official Netscape Platinum MasterCard.
By the close of 1999, AOL Instant Messenger (AIM) and AOL's Buddy List service
reached 70 million registrants worldwide. AOL also agreed to develop a custom
version of AOL Instant Messenger for Lycos's 32 million registered users.
Interactive Properties Group Highlights
During the quarter, the Interactive Properties Group continued to enhance the
market-leading services of ICQ, the world's largest online communications
community, and Winamp, the world's favorite music player, which ranked #1 and #2
in CNET's annual Top 10 Downloads for 1999.
In December, ICQ exceeded the 50 million milestone of registered users and
continues to add more than 90,000 each day. In addition, time spent with the
product continues to grow, with the average user now keeping ICQ on the desktop
for three hours and actively using it more than one hour each day. The ICQ
network also supports more than 1.2 million peak simultaneous users - second in
the world only to the AOL service.
During the quarter, America Online launched several new initiatives in online
music -- the 1999 America Online/Roper-Starch CyberStudy's most popular activity
for the majority of 18 to 24 year-olds online -- including:
** Spinner.com's new Music Download Service introduced "Playlist-To-Go" to
provide convenient access to the Web's best music. Playlist-To-Go offers free
downloads of songs; organizes them by genre; and updates them daily. The Music
Download Service also offers a custom Music Download Player, created by
Nullsoft.
** Winamp redesigned its Internet music site to make downloading and listening
to quality, customized Internet music easier and more enjoyable than ever. The
completely revamped site includes convenient navigation and user-friendly tools,
plus a streamlined user interface.
Digital City continues to strengthen its lead as the number one local online
network, signing up more than 1,300 new local advertisers in the first half of
the fiscal year and delivering on the promise of locally targeted opportunities
for AOL users and partners. In addition, Digital City announced that it will
expand its reach to a market-leading 200 cities from the current 60.
With 70% of online consumers preferring to get local entertainment information
online, AOL MovieFone has continued to offer consumers the widest access to
movie showtimes and tickets, adding the fifth largest movie chain in the
US--United Artists--to its roster of movie theater partners.
Netscape Enterprise Highlights
During the quarter, the Sun-Netscape Alliance announced new relationships with
Bolsa Mexicana de Valores, Cisco Systems, First Union, Orange and Vanguard
Group. They will leverage the Alliance's iPlanet(TM) portfolio of software and
join more than 7,000 companies already using Alliance products to run their
Internet businesses.
The Alliance emerged as a major vendor in the Internet bill presentment and
payment market with the announcement of iPlanet(TM) BillerXpert Consolidator
Edition. Combined with the Alliance's e-commerce strategy, this product is
enabling banks across the country to offer a seamless electronic bill
presentment and payment system so that consumers will only have to use one
source to pay all of their bills via the Internet.
The Alliance also launched a number of new products to help businesses thrive in
the fast-growing Net Economy and develop open digital marketplaces, including
iPlanet Application Server 6.0, iPlanet Calendar Server and iPlanet TradingXpert
3.5.
In addition, the Alliance opened the current quarter with announcements of
relationships with:
**Vodafone AirTouch, which will leverage the iPlanet infrastructure and
communications software for its global network of wireless carriers;
** IBM, to significantly expand the number of iPlanet Internet infrastructure
and e-commerce application products that are ported to the IBM AIX UNIX
platform; and
** Nortel Networks, to jointly develop a new directory-enabled solution that
will allow Internet Service Providers (ISPs) and Application Service Providers
(ASPs) to develop a new generation of service bundles.
About America Online, Inc.
Founded in 1985, America Online, Inc., based in Dulles, Virginia, is the world's
leader in interactive services, Web brands, Internet technologies, and
e-commerce services. America Online, Inc. operates: two worldwide Internet
services, America Online, with more than 20 million members, and CompuServe,
with more than 2.5 million members; several leading Internet brands including
ICQ, AOL Instant Messenger and Digital City, Inc.; the Netscape Netcenter and
AOL.COM portals; the Netscape Navigator and Communicator browsers; AOL
MovieFone, the nation's # 1 movie listing guide and ticketing service; and
Spinner Networks and NullSoft, Inc., leaders in Internet music. Through its
strategic alliance with Sun Microsystems, the company develops and offers
easy-to-deploy, end-to-end e-commerce and enterprise solutions for companies
operating in the Net Economy.
The Company's earnings conference call can be heard live on the Internet via
AOL.COM at 5:00 p.m. EST on Wednesday, January 19. To listen to the call, visit
http://www.corp.aol.com/investors.html or AOL Keyword: AOL Earnings.
This release contains forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These statements are based on management's current expectations or beliefs and
are subject to a number of factors and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. The forward-looking statements in this release address the following
subjects: future financial and operating results; the proposed AOL/Time Warner
merger; subscriber, usage and commerce growth; new markets, products, services,
features and content; timing and benefits of acquisitions and other alliances;
and availability, benefits, and timing of deployment, of new access and
distribution technologies.
The following factors, among others, could cause actual results to differ
materially from those described in the forward-looking statements: inability to
obtain, or meet conditions imposed for, governmental approvals for the merger;
failure of the AOL or Time Warner stockholders to approve the merger; the risk
that the AOL and Time Warner businesses will not be integrated successfully;
costs related to the merger; inability to further identify, develop and achieve
commercial success for new products and services and access and distribution
technologies; increased competition and its effects on pricing, spending,
third-party relationships, the subscriber base and revenues; inability to
establish and maintain relationships with commerce, advertising, marketing,
technology and content providers; risk of accepting warrants in certain
agreements; risks of new and changing regulation in the U.S. and
internationally.
For a detailed discussion of these and other cautionary statements, please refer
to the Company's filings with the Securities and Exchange Commission, especially
in the "Forward-Looking Statements" section of the Management's Discussion and
Analysis section of the Company's Form 10-K for the fiscal year ended June 30,
1999 and the Risk Factors section of the Company's S-3 filing that became
effective in November 1999.
The following scripts contain forward-looking statements within the meaning of
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995. References made in the scripts, in particular, statements regarding:
o future financial and operating results
o the proposed AOL/Time Warner merger
o new markets, products, services, features and content
o subscriber, usage and commerce growth
o timing and benefits of acquisitions and other alliances
o new platforms and access and distribution technologies
such statements are based on management's current expectations or beliefs and
are subject to a number of factors and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. In particular, the following factors, among others, could cause
actual results to differ materially from those described in the forward-looking
statements: inability to obtain, or meet conditions imposed for, governmental
approvals for the merger; failure of the AOL or Time Warner stockholders to
approve the merger; the risk that the AOL and Time Warner businesses will not be
integrated successfully; costs related to the merger; inability to further
identify, develop and achieve commercial success for new products and services
and access and distribution technologies; increased competition and its effects
on pricing, spending, third-party relationships, and the subscriber base and
revenues; inability to establish and maintain relationships with commerce,
advertising, marketing, technology and content providers; risk of accepting
warrants in certain agreements; risks of new and changing regulation in the U.S.
and internationally.
For a detailed discussion of these and other cautionary statements,
please refer to the Company's filings with the Securities and Exchange
Commission, especially in the "Forward-Looking Statements" section of the
Management's Discussion and Analysis section of the Company's Form 10-K for the
fiscal year ended June 30, 1999 and the Risk Factors section of the Company's
S-3 filing that became effective in November 1999.
Case Earnings Script
Thank you all for joining us. This is an exciting time for both America Online
- -- and for the interactive medium. As we enter the Internet Century, we believe
our company is uniquely positioned to lead the next wave of explosive growth.
I'm going to lead off today with a topline review of our record-setting second
quarter. Then I'll take a minute to talk about the priorities we have
established as we start the integration process that will join the forces of
America Online and Time Warner.
Finally, Bob will give you a full operational overview of the quarter, along
with some thoughts on the opportunities we see for the Time Warner combination,
and Mike then will give you a closer look at the quarter's financials.
As today's results show pretty clearly, AOL's operational performance strongly
positions us to extend the leadership of our current brands and make the most of
new business opportunities.
We could not be more pleased with these record results for the quarter. Our
revenues increased 41% over last year to $1.6 billion. Subscription revenues
reached the $1 billion mark for the first time, and -- growing even faster --
our advertising, commerce and other revenues rose 79% to a record $437 million.
Once again, we set a record for quarterly membership growth, with more than 2.1
million new subscribers -- 1.8 million net new members on AOL and more than
300,000 net new CompuServe members. This put us over the historic 20 million
membership mark on the AOL service, which finished the quarter with a total of
20.5 million members.
And AOL International continued its accelerating growth, with our European joint
venture growing to 3.1 million members and the launch of our first Latin America
service in Brazil. Including CompuServe and the newly gained Gateway.net
subscribers, we had a total of 23.8 million subscribers at year's end.
So, I'm proud to say that we closed out 1999 with the strongest performance in
AOL's history - and it matched our strong commitment to building a medium we can
be proud of. During this quarter, we launched a number of initiatives to benefit
society -- from My Government, a Web site to help citizens connect with their
government to Helping.org, the e-philanthropy Web site.
And together with our industry and community leaders, we launched the Digital
Divide Network and PowerUP - two new programs to ensure that no one gets left
behind in the Internet Century.
So that's how we closed out the last year of the 20th Century - and, needless to
say, we kicked off the first year of the new millennium with our historic merger
with Time Warner. We believe that this partnership will change the landscape of
media and communications - creating a company with unmatched capabilities that
is uniquely positioned to capitalize on all of the opportunities of the next
Internet Revolution.
Our merger with Time Warner is a bold step that will extend our leadership as
the interactive medium moves into the next wave of explosive growth -
accelerating the growth of our respective businesses across the board, and
positioning us to create new businesses with major market opportunities. We will
draw on one another's strengths, combining the force of America Online's
superior distribution capacity and Internet expertise with Time Warner's
unsurpassed content and cable assets.
Together, we will dramatically advance the convergence of media and
entertainment, communications, and the Internet; and we will build bridges
linking the television, the telephone and the PC to create new and enhanced
services.
And make no mistake: This merger is not just about putting different forms of
media together. It is about creating something new and powerful -- a truly
mass-market interactive company, providing services on a global level that will
become even more central to people's lives.
When it comes to valuing our combined company, we realize that we are creating
an enterprise that has no direct comparable. Clearly, the new company will be an
Internet-powered enterprise and the unquestioned leader in interactive services.
We believe AOL Time Warner will grow EBITDA by about 30 percent -- which is
comparable to the growth rates of other leading Internet powered companies like
Cisco and Microsoft.
Given the trading multiples leaders like these enjoy in the market today, it is
clear that there is lots of value to be created for our shareholders, and we
look forward to doing just that.
So, let me take a few minutes to explain to you what our priorities are in
putting this new company together.
First, we will focus on ensuring that our new company is organized and ready to
move fast to take advantage of the huge opportunities to grow terrific new
businesses. With all the necessary resources in-house, and no obstacles to using
them, the new Company will have a free hand to innovate with flexibility and
speed.
As you probably know, on the day the merger became public, we announced several
exciting agreements that immediately build on the strong relationships between
the two companies. For example, America Online and Time Warner will combine our
assets to create new expanded services across a range of America Online brands,
including AOL, AOL Instant Messenger, Digital City, AOL MovieFone and AOL Search
... covering categories such as music, entertainment, broadband content and
access, news, technology and telephony.
In fact, we are ready now to begin reinventing television for the 21st Century
- -- applying some of the lessons we've learned over the past ten years to create
new levels of personalization and interactivity never before seen on television.
Second, we will structure AOL Time Warner with great clarity to empower our
combined roster of incredibly talented, entrepreneurial executives - boosting
their ability to react quickly and compete successfully on Internet time.
Third, we will make sure that all 80,000-plus employees know that they are
agents of change -- working to make a difference in the world. We know the best
way to attract and retain talent is to offer people at every level the chance to
be part of something bigger than just a successful business, as important as
that is.
Fourth, we will work to make the most of cost-saving and revenue-producing
synergies. We will see spectacular new economies of scale for our technologies
... along with tremendous potential for cross-promotion and audience building
across all of our world class brands. And, of course, with bigger audiences
across multiple brands, we can more efficiently package advertising and commerce
opportunities.
Fifth, we will make certain that the combination of these two companies keeps
consumers at the center. Staying focused on the needs of consumers is what built
both of our companies, and it is what will make AOL Time Warner great into the
future.
Together with Time Warner, we have learned a good deal about introducing
innovative new technologies and content to consumers. We know that they want
convenience and ease-of-use, at a predictable price, and they want access from
anywhere at anytime. And we totally appreciate that we are not just selling
products; we are enabling a new way of life.
And, finally our new Company will continue working to fulfill AOL's central
mission of building a medium that benefits society. We will remain focused on
bridging the digital divide, ensuring privacy and making the Internet safe for
children.
That, and more, will help us make AOL Time Warner the most valuable company -
and the most respected company, in the world.
Now let's hear from Bob...
Pittman 2Q Earnings Script
Thanks, Steve, and good afternoon, everybody.
For the second time in just over a week, we are delighted to talk to you about
more great news on America Online and the interactive medium itself.
The quarter's exceptional results underscore the powerful momentum behind our
global businesses, and how we can use our cost-effective infrastructure to
accelerate growth across all of our brands -- both our paid subscription
services and our free Web services -- around the world.
And we are seeing the medium increasingly reach more and more of the mass market
audience, e-commerce become more and more a part of people's daily lives, the
Internet truly turning more and more into an international phenomenon, and more
and more tangible extensions of interactivity beyond the PC.
Today, we are taking the first steps onto the next stage of the Internet's
development, and America Online is once again leading the way. Our merger with
Time Warner is at the heart of that move.
Together, AOL Time Warner is the first company to have all the world-class
brands, unmatched infrastructure, technological expertise, and shared vision to
take full advantage of the Internet's real potential -- creating growth and
innovation.
What I would like to do today is take a few moments to offer some more
perspective on the merger, and then review this quarter's across-the-board
success with some specific thoughts on how the incredible combined capabilities
of the new company will drive us forward much faster than either of us could
achieve alone.
First, I would like to give you a brief update on the merger transition that
already is underway. As you know, I sit on the task force with Dick Parsons, Ken
Novack and Richard Bressler. We had a very productive meeting a few days ago and
have talked every day since our announcement. We have also set up several teams
among our executives to start focusing on a range of operational issues.
And, to the extent permitted, we are meeting with each other's executives on a
range of new commercial agreements. Jerry Levin, Dick Parsons and Richard
Bressler came here to Dulles and met with our top executives. So we are off to a
strong fast start and I can promise you we will keep up this pace.
As you know, Time Warner and we were able to put together 10 deals in a single
weekend before the merger announcement -- involving household names like CNN,
AOL, In Style magazine, Time Warner Music Group, and MovieFone. That should
begin to give you a sense of how rich the possibilities are.
Because AOL Time Warner will be the first large-scale Internet company, we will
benefit hugely from all the first-mover advantages of being a pioneer. As we
also know, traditional measures often fall short of capturing the value of
combinations that break paradigms.
I know partly what's on your minds is what the growth rate will be for the new
company. Let me address that head on. With the combined company's assets, there
are many significant opportunities for us to drive dynamic growth. Today, I will
discuss some of the exciting possibilities in just five major categories -
music, subscriptions, cable, telephony and cross-promotion - and help fill in
the blanks for you on each in a few moments.
Over the past few decades, there have been businesses with top brands, solid
earnings, big customer bases, and significant habitual usage that are utterly
transformed by a dynamic catalyst. These companies, or whole industries, then
have shot up to new and dramatically higher growth rates almost immediately
after this transforming change.
In the 1970s through the early 1980s, the music industry was in the doldrums and
cable was only a Mom & Pop industry that just provided a way to get distant
broadcast TV signals.
In 1979, the net dollar shipments of recorded music reached $3.7 billion. Only
after the introduction of the compact disk did music shipments finally surpass
$4 billion -- in 1984 -- with $4.4 billion.
Because of the compact disk, the entire music business was able to reinvent
itself with new consumer demand -- becoming one of the big growth industries of
the 1980s and 1990s -- exploding to a $13.7 billion industry by 1998, with the
sales of CDs moving from $17 million in 1983 to over $11 billion in 1998.
A similar transformation took place in the cable industry after the emergence of
satellite delivery of cable networks to local systems. Networks like HBO, CNN,
and TBS took advantage of the cable infrastructure to literally create
incredible value where there was none just a few years before.
Again, a slow growth rate was transformed into a high growth rate. For example,
total cable subscription revenues in 1975 were $883 million -- shooting up to
$2.6 billion in 1980 and $17.5 billion in 1990 -- and then it headed even higher
with $33.5 billion in 1998.
Behind the merger is our strong confidence that you will be seeing the same
explosive and transforming growth with AOL Time Warner -- if not even more
spectacular. In a world where -- as Andy Grove reminds us -- all businesses
eventually will be Internet businesses, AOL Time Warner's combined capabilities
will give it limitless potential and make it the hallmark of this global
revolution.
So, in short, the Internet is that catalyst to transform growth rates. Indeed,
it's going to make cable networks and the CD, in comparison, seem like small
transformations.
That's because the extraordinary assets of these two companies never overlap,
but everywhere complement one another. Each holds the other's missing pieces.
AOL Time Warner will be able to capture unique value that neither America Online
nor Time Warner could ever hope to approach on their own.
Our Internet expertise, well-known brands, infrastructure and audience will have
an electrifying effect on the value of Time Warner products and businesses.
Let me take you through just a few possible examples from subscriptions and
marketing to broadband and advertising sales.
With HBO, Time, Inc., and Time Warner cable, Time Warner has nearly 100 million
subscriptions. AOL and CompuServe have over 23 million. The ability to move a
meaningful portion of the Time, Inc. subscriptions to AOL's "evergreen" billing
and selling new subscriptions at almost no incremental cost dramatically alters
the economics of the magazine business.
Likewise, the ability to sell AOL subscriptions through all these Time Warner
products at virtually no cost has -- as you can see -- a huge impact on the
bottom line. And the brand advertising and cross-promotion with all Time Warner
is just as efficient, leading to big savings - especially when you consider we
now spend nearly $1 billion annually on marketing at AOL alone.
And, of course, we will have significant cost-savings beyond just marketing and
subscription sales. Think about call centers, data centers, and customer
service.
Another example of creating new value is broadband. Using our infrastructure, we
will be able to provide Time Warner cable with a cost structure for operating
broadband services that it could not reach on its own.
Remember, too, broadband is an upgrade market, and we have half of all online
customers today in the US. That means we have a unique opportunity to upgrade
these members at almost no marketing cost and without asking them to change
brand preference -- an advantage no other company can replicate.
Also, keep in mind the great efficiency that we have in advertising & commerce
sales. A recent Myer's Group research study found that the three media companies
most sought after by marketing leaders are America Online, Time Warner, and
Turner Broadcasting. Imagine the power of having them all under one roof.
Finally, using the AOL infrastructure, we'll be able to build, launch and
operate interactive extensions for all Time Warner brands - giving them
immediate major reach at a fraction of the cost of Time Warner doing it on its
own. Right now, for example, we operate our Web portals, ICQ and AOL.COM, at
about 20% of the cost of free-standing competitors like Yahoo! or Lycos - a
clear example of the economics of a shared infrastructure.
Let me turn now to the second quarter's record results that show America
Online's multiple brands continued to expand their scale and usage across every
meaningful consumer platform -- an indication of the power of the catalyst that
will be used to create new value when combined with Time Warner's existing
businesses.
We're going to cover them all from AOL and CompuServe to ICQ and Netscape to
Spinner and Winamp. We've got all good news and many connections to make to Time
Warner, so my talk today may take a few minutes longer than usual.
Our paid subscription services topped a total of 23.8 million members - a new
record -- and our free Web services total 135 million registered users and
counting Netscape's browser users, it climbs to over 200 million. Combined, they
now have unduplicated reach to 80 percent of all Internet users in the US.
This all starts with our flagship AOL service, which passed the historic 20
million mark in December and finished the quarter with 20.5 million members. At
the same time, average daily usage increased to 57 minutes by year's end, up
from 48 minutes in 1999's second quarter, and now has reached 63 minutes. Peak
simultaneous usage has hit 1.4 million members, supported by a continued network
buildout.
A major driver of this record subscriber growth and usage is our next-generation
software, AOL 5.0, which today accounts for almost 60 percent of current usage.
AOL 5.0's "My Calendar" is our most popular new feature ever, with almost 6
million subscribers setting up the personal scheduler.
Our value brand, CompuServe 2000, continued its success with a record 441,000
new members, and ended the quarter with more than 1 million total. We are
enhancing the member experience through new features, such as CompuServe
Calendar and CompuServe NetMail, and through new partners like Net2Phone.
In addition, with our Gateway agreement, we now operate Gateway's customized
online service, which had 746,000 paid subscribers at the end of the quarter.
Later this year, we will launch another customized service with Wal-Mart.
Because of our efficient shared infrastructure, we are able to operate these
services at a fraction of the cost of a stand-alone operation and reach even
more new members.
Our free Web services also are in full stride. ICQ passed the 50 million
registrants milestone in December, and continues to add over 90,000 each day.
The ICQ network also supports more than 1.2 million peak simultaneous users -
second only in the world to the AOL service. ICQ was download.com's most
downloaded software in 1999 -- outpacing the rest of the top 10 combined.
Over the next 6 months, ICQ will launch two new versions of its award-winning
product that will offer new, advanced features -- including localized language
capabilities, e-commerce offerings, free personal homepages, as well as ICQ
Radio and Calendar -- to enhance the user experience.
AOL Instant Messenger, with more than 70 million users including the AOL
community, has just expanded its base with a custom version for Lycos' 32
million registered users.
During the quarter, the Sun-Netscape Alliance launched a number of new products
for Net Economy including Internet bill presentment and payment, and announced
new relationships with such leading companies as Cisco Systems, First Union, and
the Vanguard Group. Earlier this month, the Alliance launched partnerships with
IBM, Nortel Networks, and Vodafone AirTouch, which will use iPlanet
infrastructure and communications software for its global network of wireless
carriers.
During the quarter, Netscape Netcenter's total registered users climbed 3.7
million to 24.4 million. We introduced a new homepage for Netcenter, as well as
launched Netscape Radio, which uses Spinner, and Winamp on Netscape Communicator
4.7. In addition, AltaVista and AT&T WorldNet licensed our Internet search
director -- the Netscape Open Directory Project. And, today, Netscape and
Citibank, an anchor tenant in Netcenter's Personal Finance Center, introduced
the official Netscape Platinum MasterCard.
And thanks to our pending acquisition of Mapquest.com announced during the
quarter - combined with DCI - AOL brands will be able to offer users and
partners a comprehensive local package incorporating directions, shopping,
dining, movies and other entertainment options -- over the PC and via cell
phones, Palm Pilots, and other non-PC devices.
Our music sites continue to be the most popular and powerful on the Web. Spinner
recently introduced its "Playlist-To-Go," and WinAmp -- the world's favorite
music player -- has redesigned its navigation, tools, and interface to make
downloading and listening easier and more enjoyable.
But we're not resting on our laurels. We've also continued to focus on improving
the member experience across our services with new content and services from a
range of popular brands.
** The 100-million-dollar agreement with Monster.com;
** An agreement to make Electronic Arts responsible for all content on AOL's
Games Channel.
Most importantly, we never forget that the consumer experience is what this
business is all about -- and that powerful branded partners attract users, and
create value for the service that delivers them. That brings us back to the Time
Warner deal.
AOL Time Warner will be able to do for music what AOL did for e-mail. Our
Cyberstudy showed that more than 60 percent of young users 18 to 24 are
downloading music, and that more than three-quarters of 9 to17 year-olds are
interested in downloading music.
The most amazing point about digital downloads is that it has this kind of
success already, yet it requires a good bit of technical savvy and still is hard
to do. Once we make online delivery easy and convenient, we will be able to
build community and commerce around Warner Music Group's valuable music assets
- -- creating new value for America Online and a new delivery vehicle for Warner
Music.
And you can see the power of online movie promotion in our highly successful
collaborations with Time Warner for Austin Powers and of course, You've Got
Mail. But that's just scratching the surface of what we can achieve in
cross-promotion and even content services with MovieFone and the other AOL
brands, especially as we move to new forms.
As I mentioned earlier, you should also think about magazine subscriptions sold
through our paid online services. It has even more immediate bottom-line
implications.
Stepping beyond the content and marketing arena, our ICQ and AIM communications
platforms are a fantastic fit for Time Warner's cable systems as they move
toward cable telephony.
I can tell you that AOL's programming and technology teams are chomping at the
bit to work with their counterparts at Time Warner, and we can't wait to turn
them loose.
Another area in which we made big additional strides in the last quarter was
further leveraging our marketing resources. Despite our record growth, marketing
spending this quarter was lower, at 14.3% of revenues, than last year's second
quarter -- even as marketing spending by other online companies soared to record
levels.
Our new alliance with Gateway, was an important new alliance. For the first
time, the country's biggest seller of consumer PCs is featuring AOL, while we
operate their Gateway.net service.
Gateway recognized something fundamental: That when it came to making its way in
cyberspace, both in operating an online service and reaching interactive
audiences, it would be an enhancement to their business to join forces with us
and capitalizes on our expertise, efficiency and market reach than it would be
for them to build from scratch.
Today, Gateway and we announced the launch of pilot programs to introduce DSL
access -- through the "Connect with Us" section of local Gateway Country stores
in Maryland and San Diego.
Our Gateway alliance, in a way, is a microcosm of the big benefits to be
realized from the AOL-Time Warner merger. Our two companies, combined, have over
100 million paid subscriber relationships -- and literally hundreds of millions
of other users. CNN alone has a worldwide reach of one billion.
That's why so many of the first round of commercial agreements we reached
involved flexing that cross-promotional and marketing muscle. Most of those
savings will drop to the bottom line.
Let's move on to e-commerce. As Steve has told you, AOL has hit a new high in
revenues. A big part of that involved the growth we are seeing in advertising,
commerce, and other revenues, which have grown to 27 percent of our total
revenues. Our consolidated backlog of advertising and commerce revenue rose to
more than 2.4 billion dollars at the end of the quarter.
Helping to drive this success is America Online's standing as the most
sought-after media company in today's advertising/marketing world.
Our continuing success in this area is clearly driven by the increasing
mass-market acceptance of e-commerce -- as illustrated by yet another
industry-leading holiday season. Online retail sales by AOL members more than
doubled from last year to 2.5 billion dollars during the 1999 holiday shopping
season -- accounting for half of the $5 billion in Forrester's estimated total
online holiday retail sales. The average AOL buyer spent a total of $300 online
in goods and services this holiday season -- up 50% from 1998.
This year, our Shop@AOL strategy lifted the online shopping experience into the
mainstream with new, state-of-the-art tools designed around the interests and
styles of shoppers. Ninety-five percent of existing e-commerce merchants not
only renewed their current agreements, they expanded their partnerships. More
people used Shop@AOL for their holiday shopping than used the top four Internet
e-commerce portals combined.
Where does the Time Warner deal fit into this context? AOL Time Warner will be
able to offer packages that leverage our unparalleled audience reach across the
spectrum of interactive properties, publishing, television, music and cable. In
short: "location, location, location" -- to an extent never before seen online
or off. From books, videos and sports to financial services, travel and
communications -- you name it -- the potential of our combined brands for
e-commerce is endless.
With an eye to the world outside of the US, I'm pleased to report that AOL
International showed strong growth in both subscribers and new markets during
the quarter. We want to thank Jack Davies for his great years of leadership at
AOL International and welcome Michael Lynton, our new President of AOL
International.
As Steve noted, membership in AOL Europe surged past 3.1 million. And, last
quarter, Media Metrix ranked the AOL service across Europe as #1 in online usage
- -- the strongest indicator of customer loyalty and e-commerce potential -- with
AOL members averaging 30 minutes online daily compared to less then three
minutes for the users of search portals.
In the UK, because most of the other ISPs choose to compete in the value
segment, AOL has shown record growth during the quarter as the premium service
in the much larger and profitable mass market segment. Meanwhile, our
subscription-free service, Netscape Online, has become one of the leaders of the
value market with more than 330,000 registered users. AOL Germany also showed
record growth during the quarter, becoming the first AOL International service
to surpass 1 million members.
Following the successful launch of AOL Hong Kong in September, our drive into
new countries and regions continued with the introduction of America Online
Brasil in November. Later this year, we'll extend our reach in the fast-growing
Latin America market with AOL service launches in Argentina and Mexico.
And with two-thirds of its registrants living outside the US, ICQ is the leading
international service. Eight million registrants use ICQ everyday, and the
average user now keeps it on the desktop for 3 hours, and actively uses the
service more than 1 hour each day.
International is yet another area in which the Time Warner merger will serve as
a tremendous catalyst for further growth. Not only does Time Warner operate in
more than 100 countries with thousands of employees abroad, but America doesn't
have a more popular export than its news, entertainment and music properties.
They will provide a huge competitive advantage in attracting audiences abroad.
Finally, the last quarter saw great advances in our AOL Anywhere strategy. And
this month, we previewed AOL TV to rave reviews at the Consumer Electronics
Show. We will launch AOL TV later this year to create a whole new
television-watching experience -- using interactivity to improve people's
favorite at-home activity.
We have also just launched AOL e-mail on the Palm Computing platform -- with
thousands of members already using the service -- and announced deals with
Casio, Hewlett Packard and Compaq to offer AOL mail over their palm-top PCs.
The AOL Anywhere strategy was further strengthened by our acquisition of Tegic
Communications, the global leader in text entry solutions for mobile devices,
including most cell phones. As part of America Online, Tegic will continue to
operate as a separate business unit out of Seattle, where it will enhance T9
Text Input, as well as other text-based functions, for a host of wireless
devices.
AOL Anywhere is yet another area in which the Time Warner merger will provide an
irresistible catalyst for growth. With its combined programming, audiences and
technology, Barry Schuler and his team are tremendously excited about leveraging
the Time Warner properties over AOL TV and creating entirely new types of
entertainment on that platform, as well as all the companion devices.
News, financial, sports and entertainment content from Time Warner properties --
not to mention a range of new commerce opportunities -- will fill the growing
pipeline for these mobile devices. As we follow our members anywhere and
everywhere, the AOL Time Warner merger will ensure we give them every reason to
stay connected.
So, all in all, it was a remarkable quarter in which AOL continued its
spectacular growth and momentum in the same way we always have: by focusing on
what our consumers need and want.
Our incredible progress over the last quarter -- and our kickoff of the first
company built for the Internet Century -- demonstrate that we will continue to
build value for consumers through the creation and development of powerful
brands that meet their needs.
To turn a popular saying on its head, "everything new is new again."
This industry started over this week. AOL Time Warner represents a rare
opportunity for the market to get in on the ground floor of an all-new medium
like nothing we've ever seen before.
So if you think I'm excited about where AOL is today, and where we'll be
tomorrow with Time Warner, you're exactly right!
Kelly Earnings Script
Thanks Bob.....
As you've heard from Steve and Bob, we had a very strong quarter on all fronts.
What I would like to do today is review the consolidated results for the quarter
as well as provide some thoughts on the valuation issues associated with our
merger with Time Warner.
Once again, AOL's results underscore the positive trends in all of our
operations, as well as how we translate our success with consumers into strong
financial results.
In addition to our record membership gains, the strong growth we are
experiencing in key metrics like online shopping and time spent online all
indicate that our strategy of putting the consumer first is continuing to pay
off. We are continuing to build multiple brands and multiple revenue streams, as
well as extending the reach of our efficient infrastructure into new market
segments and into new profitable revenue opportunities.
Key take-aways from the quarter:
We grew subscribers for AOL and CompuServe by 2.1 million, a 31% increase over
our growth a year ago. This represents a record quarter for both AOL and for
CompuServe.
With registration for our Web-based brands more than doubling in the past year
to some 135 million.
We produced robust growth in Advertising, Commerce and Other revenues - up
nearly 80% percent on a year over year basis. And, a 25% increase on a
sequential basis.
This strong top-line growth and our continued focus on expense control drove a
160 basis point improvement in operating margins over the September quarter, to
a new high of 19.7%.
Once again, we saw strong increases in EBITDA 108% and in free cash flows.
Clearly, all this amounts to a strong performance by any measuring.
Now let's review the consolidated results for the quarter in a little more
detail.
Consolidated revenues for the quarter were $1.6 billion, an increase of 41% over
last year. Subscription revenues were $1.1 billion, up 36% year over
year.....making this the first quarter in which our subscription revenues
exceeded the billion dollar mark.
Our multi-brand strategy is clearly succeeding with the AOL brand continuing as
the premier service in the mass market and with CompuServe as the clear leader
in the value segment. Member retention has continued to improve for AOL, and has
reached the highest levels we've ever seen. And when you think about the fact
that in January, our average daily usage rose to 63 minutes a day, you begin to
see how well we are positioned to execute in the years ahead.
At the end of December, we had 20.5 million AOL brand subscribers worldwide, an
increase of 2.9 million in the first two quarters of our fiscal year. This
growth trajectory puts us on track to comfortably meet our full-year target of
approximately 5 million net adds for the AOL brand.
We added 440,000 CompuServe 2000 members during the quarter, putting total
CompuServe 2000 members to over 1 million and combined CompuServe 2000 and
CompuServe Classic membership to 2.5 million.
Additionally, this quarter for the first time we have added a new category of
subscribers called Custom Solutions subscribers. These are subscribers to
alternate branded services that we provide in conjunction with our partners like
Gateway and Wal-mart. This category currently includes the base of approximately
740,000 Gateway.net subscribers -- which are over and above the 2.1 million new
subscribers added by AOL and CompuServe services.
Advertising, Commerce and Other revenues continues to be our fasting growing
component of revenue, reaching $437 million in the quarter. That's up almost 80%
year over year and a healthy 25% from last quarter. This total includes $352
million in Advertising and Commerce, $47 million in Merchandise, and $38 million
in Other revenues. Looking just at the Ad/Commerce portion, we saw sequential
revenue growth of $80 million or more than 29%. That absolute growth -- not to
mention, the percentage growth -- compares very favorably with other Internet
companies and demonstrates AOL's ability to grow this business at a rapid rate
even though we're growing from a substantially larger base.
In total, Advertising, Commerce and Other revenues now represent 27% of
revenues, which compares with 21% a year ago. Advertising, Commerce revenues per
member have grown from $4.31 per month a year ago to $5.83 per month in the
December quarter.
During the quarter we signed 28 multiyear deals in excess of $1 million and
Backlog now stands at $2.4 billion, up $365 million from last quarter. And over
three times the size of our backlog last December.
Our Enterprise Solutions business continues performing to our expectations.
Notably, this business signed nearly twice the number of $1 million-plus deals
this quarter than just a quarter ago.
Moving down the income statement and starting with gross margin. Despite the
fact that we added 1.2 million domestic users, 227,000 modems, and saw average
daily usage climb to 57 minutes, we expanded gross margins from 46.1% last
quarter to 48.8% this quarter. Our increasing scale drives operating and cost
efficiencies -- indicated by the 10% sequential decline in average network cost
per hour.
In the quarter, we generated EBITDA of $453 million, an increase of 17.4%
sequentially. EBITDA margin has risen from 26.3% to 27.9% over the same time
period. And over the last four quarters, we produced $1.4 billion in EBITDA.
Free-cash flow for the quarter was $109 million versus $89 million a year ago,
an increase of 22.5%.
There were three non-recurring events reported this quarter.....that are not
included in the numbers I've just discussed with you.
First, we recognized a one-time gain of $111 million from our investment in
Sandpiper, which was acquired by Digital Island in December. Second, we recorded
a one-time marketing expense of $30 million in connection with our acquisition
of Gateway.net subscribers. And, third, there's $5 million in merger-related
expenses associated with the Tegic acquisition, which closed in November.
Moving now to Time Warner, clearly we are confident in our ability to drive
superior results, successfully executing on the opportunity and driving a
substantial increase in cash flows once the merger is consumated As you might
imagine, we've spent a good deal of time thinking through the valuation issues
related to the AOL Time Warner merger. Let me share some of our thoughts:
We have said that the opportunities and synergies that Bob outlined earlier will
drive incremental revenue and EBITDA growth that neither AOL nor Time Warner
could achieve on its own.
The combined company will have a revenue base in excess of $40 billion in our
first full year - and EBITDA of approximately $10 billion.
And our plan to achieve an increase in EBITDA in excess of $1 billion is not
included in these totals above.
This would mean that the EBITDA growth rate for the combined company would be in
the range of 30% in `01.
When you look at such companies as Microsoft, Cisco and Oracle - market leaders
in their segments - their expected EBITDA growth rates are either lower than our
targets or roughly the same as AOL Time Warner. Yet their shares have
significantly higher EBITDA multiples than the implied multiple for AOL Time
Warner. For instance, AOL Time Warner will have approximately the same EBITDA
growth rate as Cisco, however they are trading at two times the multiple. And
Microsoft, which is estimated to have EBITDA growth of approximately 20%, is
trading at an EBITDA multiple which is 40% higher than the new company.
In addition, the leader in any segment trades at a premium to the sector. As the
results we announced today underscore, AOL has dramatically strengthened its
leadership in Internet consumer services. And, by integrating our assets and
capabilities with the rich content, strong brands and infrastructure of Time
Warner, we will create an even more valuable Internet Media and Communications
company.
Now let me hand the call back to Steve for your questions.
