AOL Dials Up $154.8-Million 2nd-Quarter Loss
America Online, the computer online service provider that has been overwhelmed by its own popularity, said Thursday that network upgrades and a settlement with disgruntled customers contributed to a $154.8-million loss in its fiscal second quarter despite a 64% rise in revenue.
AOL’s revenue for the three months ended Dec. 31 grew to $409.4 million, up from $249.1 million a year earlier, as new subscribers clamored to take advantage of a new pricing plan that offered unlimited access to the computer network for $19.95 a month.
AOL signed up 1.2 million new customers during the quarter, with nearly half of them joining in December, when the flat rate was introduced. But that popularity led to widespread connection problems as 8 million customers battled to dial into a mere 200,000 modems.
Fed-up customers responded by filing at least a half-dozen lawsuits against AOL, and the attorneys general of 37 states took up the case as a consumer fraud issue. In late January, AOL agreed to offer limited refunds and rebates and severely curtail its advertising efforts until its network can better handle its current subscribers.
America Online said it would take a one-time special charge of $24 million to cover the cost of the refunds and rebates. In addition, the Dulles, Va.-based company took a $74.3-million charge in October for a restructuring that included a major change in its accounting methods. The company’s operating loss was $55 million.
Altogether, AOL’s losses total $1.64 per share, slightly worse than analysts had expected. The results were released after the markets closed Thursday. AOL’s stock closed at $38.125, unchanged in New York Stock Exchange trading.
“They have to stabilize the network or risk destroying the franchise,” said David Readerman, a software analyst at Montgomery Securities in San Francisco who expects the company to turn a profit in June. “Right now, subscribers are giving them the benefit of the doubt, but that won’t last indefinitely.”
America Online’s oversubscription problems will continue to be a financial drag on the company through April. AOL has pledged to spend $350 million on network upgrades, including installation of 150,000 additional modems. Some analysts estimate that the rebates could ultimately cost the company as much as $65 million.
“This is a transitional quarter as we move to a new accounting system and a new pricing structure,” AOL Chief Executive Steve Case said in an interview Thursday. Although he expects the company to take a charge of between $10 million and $15 million in the current quarter to cover the cost of network upgrades, “we are on track to be profitable in March,” he said.
AOL continues to be plagued by network blackouts, which prevent users from logging in to check their e-mail, read electronic publications, gather in online chat rooms and gain access to the World Wide Web. The two most recent episodes occurred Wednesday afternoon and Thursday morning while the company was making a scheduled upgrade to its network software.
Another problem looms for the company today: a “strike” by up to 50 companies that use AOL’s Company Connection online forum to provide technical support to their customers. After offering firms free access to the forum for nearly a decade, AOL told the companies that they would have to pay a $55,000 annual fee beginning in March. Strikers plan to block access to their forums and urge customers to e-mail AOL officials, asking them to come up with a less costly alternative.
“We’ve come to the conclusion that AOL doesn’t really expect anyone to do this,” said Jeff Baudin, president of MicroMat Computer Systems in Windsor, Calif., who is organizing the strike. “They figure we’ll bow out and free up bandwidth for their other customers.”
But Case said the forum is a means for companies to advertise their services, and he expects most of them to pay the annual fee.
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