Filed by AOL Time Warner Inc.
Pursuant to Rule 425 under the Securities Act of 1933
Subject Company: America Online, Inc.
Commission File No. 333-30184
The following communications contain forward-looking statements within the
meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. In particular, statements regarding the AOL/Time Warner
merger 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
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; and costs
related to the merger.
Careful consideration also should be given to cautionary statements made in
AOL's reports filed with the SEC, especially the section entitled
"Forward-Looking Statements" in the MD&A section of AOL's 10-K for the fiscal
year ended June 30, 1999 and the Risk Factors section of AOL's S-3 filing that
became effective in November 1999.
* * * * * * * * * *
THE FOLLOWING IS A PRESS RELEASE DISSEMINATED BY AOL ON APRIL 18, 2000.
America Online Posts Record Earnings
Company's FY2000 Third Quarter Income Fully Taxed & Excluding One-Time Gains,
Rises 161% to $271 Million, or $0.11 Per Share
Consolidated Revenues Increase 47% to $1.8 Billion; Advertising, Commerce &
Other Revenues More Than Double to $557 Million
AOL Service Adds 1.7 Million New Members for Total of 22.2 Million
EBITDA Climbs 120% to $492 Million
DULLES, VA, April 18, 2000 -- America Online, Inc. (NYSE: AOL) today announced
record results for the third quarter of fiscal 2000, ended March 31, 2000 --
reaching new highs for consolidated revenues, advertising and commerce revenues,
operating income, and EBITDA.
The quarter's net income, fully taxed and excluding one-time items, totaled $271
million, or $0.11 per diluted share, up from $104 million, or $0.04 per diluted
share, on the same basis last year. The Company reported net income of $438
million, or $0.17 per diluted share, up from $411 million, or $0.16 per diluted
share, in fiscal 1999's third quarter. Reported net income included one-time
gains from the sale of investments totaling $275 million this quarter and $567
million in last year's third quarter. The year-ago quarter also includes
one-time charges of $103 million. Excluding these items, operating income for
the quarter climbed more than 155% over the year-ago quarter to $383 million.
Third quarter revenues rose to $1.8 billion, or 47% over last year's March
quarter. Advertising, commerce and other revenues climbed 103% over fiscal
1999's third quarter to $557 million - marking a record $120 million increase,
or 27%, over this year's second quarter.
The AOL service added 1.7 million new members worldwide, and finished the
quarter with 22.2 million subscribers. During the quarter, the CompuServe 2000
service added 373,000 members, bringing the combined CompuServe 2000 and
CompuServe Classic membership to 2.7 million. Gateway.net added more than
100,000 subscribers for a worldwide total of more than 850,000. In total, the
Company added 2.0 million new subscribers worldwide and ended with 25.8 million
subscribers of its family of interactive services.
Steve Case, Chairman and Chief Executive Officer, said: "This quarter's results
underscore the tremendous strength of America Online's operations, and
demonstrate that we are on a clear path to continued strong growth and increased
profitability. Since we announced our landmark merger with Time Warner, we
haven't missed a beat."
Mr. Case added: "At the same time, we have taken major strides to expand our
success by leading the Internet's next wave of growth. Specifically, we are fast
turning the great promise of 'AOL Anywhere' into reality, we've launched
breakthrough Netscape browser technology to enrich the Internet experience, and
we are actively building the medium in key markets around the world. In short,
our results highlight just how strong America Online is today, and how
well-positioned it is for the future."
Bob Pittman, President and Chief Operating Officer, said: "This quarter is an
excellent example of how America Online is uniquely positioned in the Internet
industry. We have built an unmatched collection of interactive brands, which
will be further enhanced by the Time Warner merger, and we have an unparalleled
connection to consumers. We're taking online advertising and commerce to new
heights, yet we've barely scratched the surface in terms of the impact our
medium can have."
Mr. Pittman added: "Looking to the future, we are rolling out our 'AOL Anywhere'
strategy on multiple fronts - from wireless to broadband content, Internet
appliances to AOL TV - delivering even more value and convenience to our
members. We have stepped up our international expansion, with AOL Europe growing
at a record pace and several Latin American launches planned over the next year.
With Netscape 6 and the Gecko technology, we are driving the Internet experience
to multiple devices and stimulating a new generation of Web-based applications
for the PC and other devices. All these initiatives will help ensure that we
make the most of Time Warner's assets, and our transition team is already
working to identify the most promising opportunities."
For the nine-month period ending March 31, 2000, fully taxed net income,
excluding one-time items, was $679 million and total revenues were $4.9 billion,
compared to fully taxed net income, on a comparable basis, of $240 million and
total revenues of $3.4 billion in the corresponding period of fiscal 1999.
Key operating metrics from the quarter included: **Subscription Revenues:
Quarterly subscription revenues reached $1.15 billion, up 33%, from $869 million
during fiscal 1999's corresponding quarter. **Advertising, Commerce and Other
Revenues: Revenues from advertising, commerce and other revenues climbed to $557
million - an increase of 103% from $275 million during the year-ago quarter, and
an increase of 27%, or a record $120 million, over this year's second quarter.
**Backlog: The Company brought its consolidated backlog of advertising and
commerce revenue to more than $2.7 billion at the end of the quarter, up from
$2.4 billion on December 31, 1999. **AOL Member Usage: AOL members averaged 64
minutes daily online during the quarter, an increase of 16% over last year's
third quarter. **Sales and Marketing Expenses: Consolidated sales and marketing
expenses declined to 14.5% of revenues, compared with 17.4% in fiscal 1999's
third quarter.
**Operating Income: Operating income grew 155% to $383 million, or 20.9% of
revenue, up from 12.0%, excluding one-time charges, a year ago.
**EBITDA: EBITDA rose to a record $492 million for the quarter, a 120% increase
over a year ago, with EBITDA margins at 27%.
AOL Time Warner Merger Update
Working closely together in anticipation of their merger, America Online and
Time Warner this quarter launched a number of cross-promotional agreements
involving their world-class brands. These joint initiatives include:
Record-setting Warner Music downloads through America Online's Winamp and
Spinner; Time Inc.'s Real Simple magazine signing up a record 27,000 subscribers
in just five weeks through promotion on the AOL service; AOL Keywords appearing
on the covers of Time, Fortune, Money, People, Entertainment Weekly, Real Simple
and Teen People -- reaching 88 million readers; CNN Interactive becoming the
premier news partner for Netcenter and ICQ; and Warner Bros. movies and
Entertainment Weekly being featured on AOL MovieFone.
The companies also announced a Memorandum of Understanding that sets out a
framework for "open access" agreements to offer the AOL service and other ISPs
over Time Warner's broadband cable systems. The Companies expect to close the
merger in the fall.
Interactive Services Group Highlights During the quarter, the Company advanced
its "AOL Anywhere" strategy through a number of key initiatives:
*AOL Wireless: In the US, America Online announced seven major agreements with a
range of wireless carriers and device manufacturers - including Sprint PCS,
Nokia, Motorola, Research in Motion, BellSouth Wireless Data, RTS Wireless and
Arch Communications - to deliver popular AOL features and services to millions
of wireless consumers. The Company also announced the new "AOL Mobile Messenger"
service, which will offer wireless access to AOL's e-mail and AOL Instant
Messenger (AIM) applications over personal, mobile paging devices. To lead this
wireless initiative, America Online named former FCC Chairman and CEO of Time
Warner Telecommunications, Dennis Patrick, President of AOL Wireless.
* AOL/Gateway Internet Appliances: At Spring Internet World 2000 earlier this
month, the Company unveiled the groundbreaking AOL/Gateway family of specialized
Internet appliances - AOL Gateway countertop appliance, wireless Web pad and
desktop appliance - that will extend the "AOL Anywhere" strategy. Using
Netscape's Gecko browser engine technology and the Linux operating system, these
appliances with the "Instant AOL" feature - which automatically launches the
service as soon as the device is switched on - will make AOL's content, features
and services conveniently available to consumers in every room of their homes.
* AOL TV: The AOL TV service is scheduled to begin shipping in June. AOL TV will
provide state-of-the-art navigational services, a new genre of interactive
programming and a new marketing platform -- taking full advantage of Time Warner
properties.
* AOL Plus Broadband Content: This month, AOL Plus launched to deliver rich
multimedia content and features, such as streaming audio and video, to AOL
members using AOL 5.0 over any high-speed connection - TCP/IP, DSL, cable or
satellite - while still enabling them to access regular AOL 5.0 content when
using narrowband connections. Extending its advertising and commerce leadership,
the Company announced a series of significant advertising/commerce alliances
this quarter with such market leaders as General Motors, American Airlines,
Sears, Kinko's, Footlocker.com, Oxygen Media, and PurchasePro.com.
Among the newest AOL member benefits is AOL AAdvantage - the world's largest
online customer loyalty program - scheduled to launch this summer in partnership
with American Airlines through America Online's digital marketing service DMS -
to provide members more ways to earn miles and redeem them. In addition, the
Company launched its AOL Insider Savings Club, an exclusive new program that
enables members to save money on a wide range of popular goods and services. In
addition, the Company's other interactive brands enjoyed substantial growth and
made themselves even more valuable. Since its launch just over a year ago,
CompuServe 2000 has continued its strong momentum in the value segment, adding
373,000 new members in the quarter for a total of nearly 1.4 million members
worldwide. Average member daily usage also achieved an all-time high during the
quarter.
During the quarter, the Netscape Netcenter service surpassed 28 million
registered users worldwide, more than doubling its total over a year ago. And
Time Warner's CNN Interactive became the premier news partner for Netcenter.
This month, Netscape announced the preview release of its next-generation
Netscape 6 Internet browser and communications software suite, powered by the
innovative Netscape Gecko browser engine. The new browser enhances the consumer
experience by integrating popular communication and information services in a
faster, more flexible and easier to use format. As announced in March, IBM,
Intel, Liberate, NetObjects, Nokia, Red Hat and Sun Microsystems will use Gecko
technology to extend the convenience and power of the Web to a wide range of
Internet devices. This quarter, AOL Instant Messenger and AOL's Buddy List
service added 21 million registrants for a worldwide total of 91 million. Last
week, the Company launched its next-generation AOL Instant Messenger, AIM 4.0,
featuring AIM Talk, which enables online voice communication between AIM users,
and Instant Images, which allows users to exchange images and sounds.
Interactive Properties Group Highlights
ICQ, already the world's largest online communications community and the biggest
international service, continued to add an average of more than 100,000
registered users daily - adding a total of 9.3 million during the quarter to
finish with 62.4 million registered users. Over the quarter, peak simultaneous
users of ICQ climbed from 1.2 million to 1.4 million. The average user kept ICQ
on the desktop for nearly three hours, actively using it 75 minutes each day.
Next week, ICQ will launch its newest version, ICQ 2000A, that will offer
enhanced community features, improved navigation and user interface, and the
capability of operating in the workplace.
In addition, DMS partnered with Netcentives, a leading developer of e-marketing
infrastructure software and services, to bring "ICQ ClickRewards" - a rewards
program for ICQ users. During the quarter, Digital City continued to widen its
lead in the fast-growing local online market. Digital City launched its new
version of the service - Digital City 2000 - which sets the gold standard in
consumer convenience and compelling services for both local residents and
visitors. Tomorrow, Digital City will complete its expansion from 60 markets to
more than 200 markets to create the first "local everywhere" coast-to-coast
network. Advancing the "AOL Anywhere" strategy, Digital City also announced the
planned launch of Digital City Wireless to deliver the service's most popular
features to wireless phones, pagers and other handheld devices. Finally, Digital
City posted record growth in local advertising and e-commerce with more than
2,000 partners. With the Internet music market exploding, the Company's Web
music brands, Winamp and Spinner, continued to record strong growth in users.
Winamp remains the #1 favorite music player and ranked #2 - behind #1 ICQ - in
1999 downloads on download.com. Together, Winamp and Spinner reach a total of 10
million unique users each month. During the quarter, Spinner, Winamp and Warner
Music's Elektra Entertainment Group partnered to deliver secure downloads from
The Cure's latest album, "The Last Days of Summer." In just a month, there were
58,000 downloads - the most licenses ever issued for a digital song in a
one-month period. In addition, Spinner and Winamp are promoting such Warner
Music artists as Madonna and Faith Hill with featured downloads of their popular
singles as well as artist-created music channels. In addition, Winamp and
Spinner partnered with Myplay, inc., the first online digital music service to
provide their users with a virtual "locker" that allows them access to their
music collections anytime, anywhere. AOL MovieFone, the nation's largest movie
listing guide and ticketing service, attracts about 20% of all moviegoers
through both its 777-FILM phone service and the MovieFone.com Web site. AOL
MovieFone announced several new services during the quarter - including the
ability to print bar-coded movie tickets at home to avoid lines at the theater,
and the AOL MovieFone/American Express industry-wide frequent moviegoer program.
AOL International Group Highlights During the quarter, AOL International's
membership in its AOL and CompuServe services increased by 434,000 to a total of
4.4 million. Extending its standing as Europe's leading multinational Internet
provider, AOL Europe's AOL and CompuServe services reached nearly 3.5 million
members with record growth in the UK, Germany and France. In addition,
registered users of the subscription-free Netscape Online service in the UK
increased to 519,000. Underscoring the Company's commitment to global expansion,
America Online announced in March an agreement with Bertelsmann AG to
restructure their interests in the AOL Europe and AOL Australia joint ventures.
At the option of either company after January 31, 2002, America Online would
acquire Bertelsmann's interest in AOL Europe. America Online and Bertelsmann
also launched a new $250 million, four-year strategic global alliance to expand
the availability of Bertelsmann's leading media content and e-commerce
properties over America Online interactive brands. Following the Bertelsmann
agreement, America Online formed a 50/50 joint venture with AAPT Limited,
Australia's third largest telecommunications company, to operate AOL Australia's
interactive services and to develop a fully integrated Internet portal to
deliver AOL-branded content services to Australia's emerging consumer wireless
market. AOL Europe extended the Company's "AOL Anywhere" strategy with key
wireless agreements with Nokia, Ericsson and RTS Wireless to ensure its mobile
portals are compatible with current SMS and WAP protocols and handsets, as well
as next-generation General Packet Radio Service.
Netscape Enterprise Highlights Third quarter revenues for Netscape Enterprise -
including software licenses and services - grew 8% sequentially to $126 million.
Of that total, revenues from international licenses more than doubled to $47
million. During the quarter, the Sun-Netscape Alliance - under the "iPlanet
E-Commerce Solutions" brand - launched a global initiative to solidify its
position as the world's largest and broadest supplier of e-commerce software.
The Alliance announced new agreements, valued over one-million dollars each,
with twenty-three companies and governmental agencies worldwide, including
CentreComm, Xerox, Telestra, Eplus and the US Department of Defense. The
Alliance also launched new strategic partnerships with: * Palm, Inc. to provide
global wireless access to enterprise applications and services via Palm OS
handheld computers;
* Red Hat Linux to add iPlanet Messaging Server and iPlanet Web Server to the
portfolio of products available on Linux; and
* GE Global eXchange Services, a division of General Electric, to incorporate
their RMS data transformation technology into iPlanet ECXpert software.
The Company's earnings conference call can be heard live on the Internet via
AOL.COM at 5:00 p.m. EDT on Tuesday, April 18. To listen to the call, visit
http://www.corp.aol.com/investors.shtml? or AOL Keyword: IR.
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 22 million members, and CompuServe,
with more than 2.7 million members; several leading Internet brands including
ICQ, AOL Instant Messenger and Digital City, Inc.; the Netscape Netcenter and
AOL.COM portals; Netscape 6 and the Netscape Navigator and Communicator
browsers; AOL MovieFone, the nation's #1 movie listing guide and ticketing
service; and Spinner.com and NullSoft's Winamp, 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.
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.
* * * * * * * * * *
SET FORTH BELOW ARE TRANSCRIPTS OF A TELEPHONE CONFERENCE WITH ANALYSTS AND
OTHERS HOSTED BY AOL ON APRIL 19, 2000 IN CONNECTION WITH THE RELEASE OF AOL'S
FISCAL 2000 THIRD QUARTER RESULTS.
AMERICA ONLINE, INC.
Q3 FY00 Quarterly Results
April 18, 2000
Richard Hanlon, Vice President, Investor Relations
Good afternoon, everyone, and thank you for joining us for AOL's Fiscal 2000 3rd
Quarter conference call with Steve Case, Chief Executive Officer, Bob Pittman,
our Chief Operating Officer, and Mike Kelly, our Chief Financial Officer.
Before we begin, it falls to me to advise you that the call we're about to
conduct contains forward-looking statements within the meaning of the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
References made during the call, in particular statements regarding:
* future financial and operating results
* the proposed AOL Time Warner merger
* new markets, products, services, features and content
* subscriber usage and commerce growth
* timing and benefits of acquisitions and other alliances
* new platforms and access and distribution technologies
...are all 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, careful consideration should be given to cautionary statements made
in the Company's reports filed with the S.E.C., especially the section entitled
Forward-Looking Statements in the MD&A section of the Company's 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.
It now gives me great pleasure to turn the call over to Steve Case.
Steve Case, Chairman and Chief Executive Officer
Thank you all for joining us this afternoon. I'll start today with a brief
top-line review of this quarter's results and then discuss some of our
longer-term initiatives including, obviously, our pending merger with Time
Warner. After that, Bob will focus on the overall trends in the business and
give you a full operational overview of the quarter, and then Mike will give you
the key details of the quarter's financials.
If there's one clear takeaway from this quarter it is that America Online's
business has never been more robust. We have never moved more quickly to
capitalize on opportunities across so many fronts and our results demonstrate
that we are on a clear path to continued strong growth and increased
profitability. There's no question that this quarter marked a watershed in the
Company's history. Not only did we announce our landmark merger with Time
Warner, but we also have not missed a beat in building our core interactive
businesses.
At the same time, and very importantly, we've taken major strides to extend our
leadership by driving the Internet's next wave of growth. Specifically, we are
fast turning the great promise of 'AOL Anywhere' into reality. We've launched
breakthrough Netscape browser technology to enrich the Internet experience and
we're actively building the medium in key markets all around the world. In
short, our results highlight just how strong America Online is today and how
well positioned it is for the future.
During the quarter, our revenues climbed 47% over last year to a record $1.8
billion. Subscription revenues reached more than $1.15 billion, and -- expanding
even faster -- our advertising, commerce and other revenues doubled to a record
$557 million.
Our worldwide membership base expanded by more than 2 million new subscribers,
including 1.7 million new AOL members, for a total of 25.8 million across all of
our subscription brands by the end of the quarter.
This is one of the best quarters we have ever had in AOL membership growth. It
means we will add significantly more AOL subscribers this year than last,
putting us ahead of where we said we would be for our year-end total.
We are particularly pleased with our subscriber growth because it proves that we
have kept our eye on the ball, even with the pending merger with Time Warner. It
also shows that increasing competition from broadband or free services, contrary
to many dire predictions, certainly is not affecting us the way some pundits
expected, especially when you see the 2 million members that we added worldwide
during the quarter.
The growing strength of our core businesses will enable us to fully capitalize
on all the benefits that will flow from our merger with Time Warner. We have
never been more bullish on the prospects for our combined company than we are
today. AOL Time Warner will be uniquely positioned to capitalize on the next
Internet revolution. Not only will we further accelerate the growth of our
current businesses, but we will create new businesses and pioneer new
industries.
We've made a great deal of progress in developing strategies for our combined
company to lead this Internet century and we've launched a number of
cross-company initiatives to jump-start the process. In addition, we announced
the framework for open-access agreements to offer to AOL service and other ISPs
over Time Warner's broadband cable systems to provide new choices for consumers.
Let me take a moment to spotlight for you the key initiatives that we believe
will help shape both AOL Time Warner and the industry for years to come. Just as
America Online has led the explosion of the Internet as a mass-market
phenomenon, we expect to lead the transformation of the Internet into an
'everywhere and anywhere' experience.
We're doing this by first rapidly making the promise of these next-generation
Internet services a reality by rolling out a series of AOL Anywhere initiatives,
including AOL Wireless, AOL TV, AOL Plus and the AOL/Gateway Internet
Appliances. These initiatives will greatly enhance the value of our service to
consumers, as well as create major new opportunities to build value for
shareholders.
Second, Netscape 6.0 and Gecko will ensure that America Online leads the next
wave of growth by extending interactivity to multiple devices, in addition to
the PC, providing consumers with the benefits of the Internet anywhere, anytime,
and any way they want them.
By its complete support of the latest Internet standards and open-source
approach to development and licensing, Netscape is empowering the vast community
of Internet developers and ensuring that the Internet remains open and available
to all. We think it will stimulate a new generation of Web-based applications
for PCs and a wide range of other devices.
Ultimately, we believe Netscape 6.0 and Gecko will be key to a multi-platform
Webtop. This Webtop will extend the power and convenience of the Internet to
every room of the house for everybody in the home.
Finally, our agreement with Bertelsmann regarding AOL Europe reflects our belief
that the Internet is a global medium with tremendous potential for international
growth. We are committed to fully pursuing this potential, not only in Europe
but also around the world.
In short, these initiatives will make sure that our leadership continues into
the second Internet revolution so that we can better service consumers around
the world.
For many years people have been saying that convergence is just around the
corner. Today we believe we are at that corner. If you just think about the four
devices most people rely on in their homes -- the television, the PC, the
telephone and the stereo -- you'll see the distinctions among these four devices
are blurring, and interactivity is starting to connect all of them together.
Soon, televisions will come equipped with interactive programming guides and
people will be able to bookmark their favorite TV programs like they bookmark
their favorite Web sites today. They'll even be able to access interactive
services like e-mail and instant messaging while they're watching TV. Through
digital delivery, music and streaming videos will be available on demand. People
will be able to store their music on servers in their homes or keep it in online
jukeboxes they can carry with them.
For the telephone, the distinction between long-distance and local calling will
disappear and communications will be integrated with the TV and the PC. You
might be trading instant messages with somebody and then decide to switch to
voice, and you'll do it quickly, easily and affordably. Or, perhaps you'll be
able to answer the phone to the TV and make a video call.
The role of the PC in the home will change as well. Just as the TV has evolved
in many houses from a single console in the living room, people will start
having interactive devices all through the house.
The fact is, the first steps of convergence already are driving consumer
expectations, and the more they get the more they want. We believe our merger
with Time Warner is the key to fully meeting those expectations. On the day that
the AOL Time Warner merger was announced, we said that we wanted to build the
world's first global media and communications company powered by the Internet.
We want to do that not only by providing all the separate pieces, but also by
connecting the dots for consumers in a simple, convenient way that enhances
their lives.
By advancing the convergence in media entertainment, communications and the
Internet and by building bridges linking the television, the PC, the telephone
and the stereo, AOL Time Warner will become a global, mass-market, interactive
company that truly can transform people's lives.
Without question, this quarter's powerful results position us better than ever
to achieve this goal and, in the process, we hope to become the most valuable
and the most respected company in the world.
Now, let's hear from Bob.
Bob Pittman, President and Chief Operating Officer
Thanks, Steve, and good afternoon, everybody. As Steve told you, even as we've
made great strides in our merger with Time Warner, we're not slowing down one
bit. What we have done is open the throttle and accelerate the America Online
growth engine.
This quarter is an excellent example of how America Online is uniquely
positioned in the Internet industry. Not only have we delivered record-breaking
operational and financial performances, driven by our successful brands and
multiple revenue streams, but we also are making crystal clear how our key
initiatives are going to drive future earnings to the next level.
Before reviewing the quarter's operational successes with you, I do want to
expand a bit on the key initiatives that Steve mentioned. Although not reflected
in these results, these strategic steps -- our pending Time Warner merger, AOL
Anywhere becoming a reality, our AOL Europe agreement with Bertelsmann and
Netscape's next-generation browser technology -- all will fuel future growth and
profitability.
Since our merger announcements, we've been rolling out a steady stream of
agreements with Time Warner and we've been making great progress in our
transition process of putting together the new company. So far, we've rolled out
a series of very successful cross-promotions, as well as a number of exciting
carriage and programming initiatives which have great upside potential.
Most importantly, we continue to focus on creating new businesses and
transforming existing industries. Nothing underscores that better than our AOL
Anywhere strategy that we're now beginning to roll out.
Starting with wireless, this quarter we announced major agreements with seven
leading wireless carriers and device manufacturers, including most notably
Sprint PCS, to deliver popular AOL features and services to millions of wireless
users.
At the same time, our new AOL Mobile Messenger service will offer wireless
access to AOL e-mail and AOL Instant Messenger over personal, mobile paging
devices. For wireless and our other AOL Anywhere initiatives, we believe that
consumers will find a wide range of services from MovieFone, Digital City and
MapQuest (whose acquisition we expect to close in the current quarter),
especially useful to their AOL Anywhere experience.
These products will become anchor services on wireless devices -- the equivalent
of e-mail on the PC -- and this way we'll drive new growth for these businesses
beyond our current missions, build their value and, at the same time, serve as
additional gateways to the other AOL products and services.
Not only did total wireless customers in the U.S. grow approximately 25% last
year to more than $86 million, but 70% of AOL households own wireless devices.
It's a great opportunity for us. To lead our wireless initiative, we named
Dennis Patrick, former FCC Chairman and CEO of Time Warner Telecommunications,
as our President of AOL Wireless.
In another major AOL Anywhere initiative, this month we introduced the
ground-breaking AOL Gateway family of products, introducing Instant AOL, which
automatically will launch the service as soon as the device is switched on.
Running on the Linux operating system, these first products will include a
countertop appliance, a wireless Web pad and a desktop appliance that will
extend AOL's content, features and services to consumers in every room of their
home.
We also launched AOL Plus, the content half of our broadband strategy. A
bandwidth detector built into AOL 5.0 automatically provides broadband content
if our members have a high-speed connection. And, when those same members also
use a narrow-band connection (which nearly all of them do at one time or
another), they will then automatically receive the appropriate content. This
makes us the only ISP capable of conveniently delivering the right content one
hundred percent of the time over both narrow band and broadband connections.
Another key to our AOL Anywhere strategy is AOL TV. Its recent preview is well
received and we think that bodes very well for AOL TV's initial rollout this
summer and its value to AOL Time Warner.
Crucial to all these AOL initiatives, as Steve mentioned, is our Netscape 6.0
browser with its breakthrough Gecko browser engine technology. Netscape 6.0 and
Gecko operate across a wide range of platforms and Internet devices, enabling
our AOL Anywhere -- like our AOL/Gateway appliances -- and making the Internet a
more constant and convenient companion in consumers' lives.
The preview launch of Netscape 6.0 and Gecko marks our success over the past
year in combining Netscape's pioneering technological leadership with America
Online's unparalleled focus on consumers.
Finally, our agreement with Bertelsmann to restructure our interest in AOL
Europe underscores our confidence in the future of this fast-expanding market
and gives us added flexibility to respond to market opportunities. During the
quarter, we experienced continuing membership growth in Europe, especially in
the key U.K., German and French markets. And we are extending our AOL Anywhere
strategy there through major wireless pacts with Nokia, Ericsson and RTS
Wireless.
We're pleased to continue our close Bertelsmann relationship with a new
$250-million, four-year strategic global alliance to expand the availability of
Bertelsmann's leading media and content and commerce properties across our
brands.
So, as you can see, we laid a strong foundation for our pending Time Warner
merger, AOL Anywhere strategy, AOL Europe agreement and Netscape's new browser
technology for our future success.
Now I'd like to take a few minutes to highlight just how successful this quarter
was, from the success of our subscription services and our Web-based brands to
the record growth in advertising and commerce.
Our flagship AOL service added another 1.7 million subscribers for a total of
22.2 million members, worldwide. Also, during the quarter, average daily usage
has soared past the one-hour milestone for the first time and now has reached 64
minutes a day. Just as important, in sharp contrast to other Internet providers,
AOL members spend about 85% of their time online within the four walls of our
service, a key predictor of our advertising and commerce success.
To make our service even more valuable to our members, we also launched the AOL
Insider Savings Club, to enable members to save money on a wide range of popular
goods and services. Through DMS, our Digital Marketing Unit, we also partnered
with American Airlines to create AOL Advantage, the world's largest online
customer loyalty program that we will introduce this summer to give our members
more ways to earn and redeem miles.
Turning to the industry's leading value brand, CompuServe 2000 added 373,000 new
members during the quarter. In just over a year since its launch, CompuServe
2000 has shown remarkable growth, now totaling nearly 1.4 million members. For
the entire CompuServe brand, we now have 2.7 million members, worldwide. In
addition, CompuServe members' average daily usage achieved an all-time high
during the quarter.
Our Web-based brands also extended their growth and development. We continue to
see strong growth for Netscape Netcenter, which surpassed 28 million registered
users worldwide, more than double the number of users from the previous year.
Marking another major success for the Netscape organization, Netcenter's traffic
now surpasses both Go.com and Excite and Media Metrics home/work audience,
proving its unique value in the marketplace.
Our world-leading AOL Instant Messenger and AOL Buddy List service also
continued its robust growth, ending the quarter with 91 million registrants
worldwide. Last week we launched AIM's new version 4.0, featuring AIM Talk,
which enables online voice communications between AIM users, as well as Instant
Images, which allows users to exchange images and sounds.
ICQ extended its leadership as the world's largest online communications
community and biggest international service, adding 9.3 million registered
users, for a total of 62.4 million. Next week, ICQ will launch its latest
version, ICQ 2000A, to offer enhanced community features, improved navigation
and user interface, and the capability of operating in the workplace behind
firewalls.
In addition, we partnered with Netcentives, again through DMS, to bring
'ClickRewards' to ICQ users. Over the quarter, peak simultaneous usage of ICQ
climbed from 1.2 million to 1.4 million; the average user keeps ICQ on the
desktop for three hours and actively uses it for more than 75 minutes each day.
Digital City continued to widen its lead in the fast-growing local online
market. Tomorrow Digital City will complete its current expansion from 60
markets to more than 200 communities nationwide, creating the first 'local
everywhere' coast-to-cast network. In addition, we introduced the new Digital
City 2000 service that sets the gold standard in consumer convenience and
compelling services for both local resident and visitors.
AOL MovieFone, the largest movie-listing guide and ticketing service, attracts
20% of all moviegoers through both its 777-FILM phone service and MovieFone.com
site, to provide our members and other Internet consumers with a new level of
convenience. MovieFone has unveiled such exciting new features as the ability to
print bar-coded movie tickets at home to avoid lines at the theater, and the
MovieFone/American Express, industry-wide, frequent moviegoer program.
With the Internet music market expanding, our Web-based Winamp and Spinner
brands continue to extend their record growth in users. Winamp is the number-one
favorite music player and ranked number two only to ICQ in 1999 downloads on
Download.com. Together, Winamp and Spinner reach a combined total of 10 million
unique users each month.
Just to illustrate this great potential, we partnered with Warner Music's
Elektra Entertainment Group to provide secure downloads from The Cure's latest
album, "The Last Days of Summer." Both through Winamp and Spinner.com, fans
downloaded from this album more than 58,000 times in just one month -- the most
licenses ever issued for a digital song in a one-month period.
When you look at AOL, the music opportunity is even greater. A recent survey
showed that AOL members are avid music consumers: 90% of AOL members listen to
music every day and more than three-quarters buy music. Looking to the future,
more than two-thirds of AOL members say they want to buy and download music
online, pointing to its convenience; and many say they expect to spend more
money on music by buying it online.
Finally, let's review this quarter's advertising and commerce success. As Steve
noted, Advertising, Commerce and Other Revenues climbed 103% over last year to a
new high of $557 million, marking a record $120-million increase, or 27%
increase over the previous quarter.
In another advertising/commerce milestone, our consolidated backlog grew by more
than $300 million to more than $2.7 billion. Helping to drive this growth during
the quarter have been a number of strategic alliances with such companies as
General Motors, Sears, Kinko's, Footlocker.com, Oxygen Media, and
PurchasePro.com, providing even more benefits and services to our subscribers,
as well as other Internet consumers who use our Web-based brands.
The Sun/Netscape alliance experienced a successful quarter with its revenues
increasing sequentially more than 8%. The alliance also launched a global
initiative to establish its brand's identity as 'iPlanet E-Commerce Solutions.'
In addition, iPlanet shipped 15 new product releases and earned several product
awards, so it's quickly solidifying its position as the world's largest and
broadest supplier of e-commerce software.
In sum, this has been a remarkable quarter. We've undertaken one of the largest
mergers in history and we'll continue to put the power of the Internet behind
all these world-class brands to drive new growth. At the same time, we're
lifting our operational and financial performances to new record-breaking levels
and extending our leadership of the industry. We are building a fast-moving,
nimble new company, with the best brands, unmatched infrastructure,
technological expertise, and a shared vision for the future of the Internet that
will make us uniquely successful in the years ahead. And I have personally never
been more excited.
With that, let me turn it over to Mike.
Mike Kelly, Senior Vice President and Chief Financial Officer
Thanks, Bob, and good afternoon, everyone. We are clearly pleased with this
quarter's strong performance, not only from a financial perspective, but also
from an operational one. As both Steve and Bob have made very clear, we feel
this is the best quarter in AOL's history. This performance underscores the
strong momentum in our operations as well as the strong economic foundation we
have built at AOL, which we will further energize when we merge with Time
Warner.
As you are aware, Time Warner reported results last week that were quite strong
and the pro forma results for the combined companies are very impressive, even
before taking into consideration the synergies and new business opportunities
that we anticipate. The companies posted combined revenues of $8.4 billion, up
14% from last year, and EBITDA of approximately $2 billion, up 25%. Clearly,
we're building this new company on a very strong foundation.
Some highlights of the AOL results: Subscriber Growth is once again strong, both
domestically and internationally, for both AOL -- in the premium segment --
which added 1.7 million new members, and CompuServe -- as a value brand -- which
added more than 200,000 net new members for the quarter. So far this year, we've
added more new AOL customers than we did during the same time frame last year.
Registration for our Web-based brands now exceeds 161 million, compared to 68
million a year ago.
Advertising, Commerce and Other Revenues totaled $557 million, an increase of
103% over the last year, and grew a record $120 million, or 27% sequentially.
Even with the surge in the usage of the AOL service to more than an hour a day,
gross margins expanded to 49% as we continued to drive down our network costs.
In fact, we've succeeded in lowering network costs per hour 14% from a year ago,
even as our volume of network traffic has soared to nearly 20 million hours of
usage per day, nearly 50% greater than a year ago.
Our current fully-burdened network cost is now in the low $0.30-an-hour range
and can be expected to continue to decline, helped by our new agreements with
GTE and Worldcomm.
Robust top-line growth, also fueled expansion in our Operating Income, which
grew $64 million sequentially to $383 million, and Operating Margins increased
to 21%.
We saw continued strength in EBITDA, increasing 120% to $492 million. These
results clearly underscore the strength of the AOL business model.
Taking a closer look at our consolidated results, Total Revenues for the quarter
were $1.8 billion, a 47% increase over last year. Subscription Revenues
increased 33% year-over-year to $1.15 billion.
We finished the quarter with 22.2 million AOL members worldwide, increasing the
number of new subscribers to nearly 4.6 million in the first three-quarters of
the fiscal year. This compares to just 4.3 million new net adds during the same
time frame last year.
Turning now to the fastest-growing portion of the business, the $557 million in
total Advertising Commerce and Other Revenues is composed of $463 million in
Advertising and Commerce, $58 million in Merchandise, and $36 million in Other
Revenues.
Focusing for a moment on just Ad/Commerce, we saw sequential growth of $111
million, or 32%, and year-over-year growth of $251 million, or 118%. These
results underscore how we are succeeding in monetizing our many brands in a
competitive marketplace.
In total, Advertising, Commerce, and Other Revenues now comprise over 30% of our
total revenues, compared to just 22% a year ago.
Advertising and commerce revenues per AOL member per month have risen 50% to
$6.74 from $4.49 a year ago. Plus we posted $138 million in advertising/commerce
revenues this quarter from our Web-based brands, also a new high.
During the quarter we signed 37 multi-year deals in excess of $1 million to help
bring backlog to a total of $2.7 billion, up over $300 million from last
quarter.
Our Enterprise Solutions business is also performing nicely, with revenues up
16% to $126 million from $109 million a year ago.
Moving down the Income Statement to Cost of Services, we saw a 13% increase in
expenses sequentially to $937 million. This increase in expenses,
quarter-over-quarter, was driven by the continued buildout in the network as
well as a surge in overall usage.
During the quarter we added another 300,000 modems, for a total available to
more than 2 million. As we continue to grow our subscriber base on both AOL and
CompuServe, and the AOL member-per-usage/per-day rose 16%, we hosted a record
1.7 billion hours in the quarter, an increase of 19% over last quarter, and a
49% increase from a year ago.
Cost of Service was also impacted by the expected seasonal increase in member
services' call volume associated with new members brought on during the last two
quarters, although all these increases were partially offset by the drop in
network cost-per-hour that I spoke about earlier.
The impact of all these factors was a gross margin increase to 49% versus 44.7%
from last year.
Marketing Expenses amounted to $266 million, or 14.5% of revenues, which is
consistent with the trailing run rate for the past four quarters. For the near
term we expect marketing expenses as a percentage of revenue will remain in this
range, even as we roll out other initiatives.
At 21%, Operating Margins set a new record, surpassing 20% for the first time.
For perspective, it was only three quarters ago that our operating margins broke
into the teens. And as we look at the Operating Margins on incremental revenues
for this quarter, once again we see that additional revenues produced $0.30 of
operating margin.
EBITDA grew 120% to $492 million and our EBITDA margin rose to 27%, from 18% a
year ago.
Our reported Net Income of $438 million, or $0.17 per diluted share, was up from
$411 million, or $0.16 diluted share we reported last year. These results
included one-time gains from the sale of investments totaling $275 million this
quarter, and $567 million in last year's third quarter. The year ago quarter
also included one-time charges of $103 million.
In closing, as we head into the final quarter of the fiscal year, we continue to
see strong, underlying fundamentals in each of our operations, and we're clearly
on track to make this a very successful year.
Let me turn the call back to Steve for your questions.
Q: Can you talk a bit about what's in the backlog and how it gets accounted? Are
there risks to that backlog number because some small companies may not be
around six months from now?
A: We take a look at the backlog each and every quarter. We account for backlog
as firm, contractual backlog that's almost guaranteed revenue, if you will,
coming off the contracts that we sign. We look at each one of the customers that
we do business with and we structure our contracts in such a way that if we have
some financial risk with a given customer, we usually receive upfront payments
on that backlog. So, with a lot of the backlog that you see in our deferred
revenue, a fair amount of that is what we've already received in cash.
In addition, each quarter we go through an analysis of our backlog to see what
comprises the backlog overall, and we make any adjustments that we feel are
appropriate, given the risk we see in a business. We don't see any significant
risk.
Q: What's the likelihood of AOL and Time Warner putting a cable deal together,
near term, or at least before the close of the merger?
A: I think it's highly likely that we will complete a deal prior to the closing
of the merger -- indeed, highly likely that we'll complete a deal this quarter,
because the discussions we've had have been very constructive and productive,
and we have alignment on most of the issues. It's probably a little premature to
get into the specifics of it, but I would say we would not expect it to have any
impact on the overall business model.
When we talk about completing a deal, it would be with a high degree of
specificity, and it will be something that we think works for our business,
works for their business, and is a model that will enable us to do similar deals
with other cable companies and allow other ISPs to do similar deals with Time
Warner. What we said on day one of the merger was that we were committed to the
principle of open access.
About six or eight weeks ago we announced our Memorandum of Understanding,
putting some real specificity, in terms of concepts of what we meant by that --
features like streaming video and the ability to build directly for customers --
and we're now in the phase of trying to have a commercial agreement between AOL
and Time Warner Cable, and we think it's not too far out in the future. And we
do believe that that's going to be a model that likely will be embraced by other
companies.
Q: The AOL online customer base seems to be pretty solid; could you talk a
little bit about that going forward? Second question -- could you talk a little
bit about the non-U.S. business, or the non-European international business?
Third question - would you give more detail on the initial launch of Netscape
6.0?
A: I think we have pretty much hit a groove with subscriber growth. You're
seeing the power of a brand; you're seeing the reliability of our marketing
machine; you're seeing the predictability of long-term, in-place relationships
and marketing programs. We have said before that we expect to take about half of
the new people coming online. It looks like we're hitting that, and I would
expect that to continue; I see no reason not to.
We have seen the emergence of the value segment, and, fortunately for us, the
CompuServe service repositioned as a value service has been doing very well and
has been yet another source of growth for us.
In Europe, again, we are seeing some very interesting developments. It's
curious, when the competition heated up a lot in the last year, I think people
were worried about us. Actually, it appears to have gotten people in Europe
interested in the Internet, and AOL has been a beneficiary. We've seen very
strong growth in our three key markets with the AOL brand -- U.K., France and
Germany.
In the U.K., where, as you know, the ISPs share revenue with the telcos, we
launched Netscape Online as a so-called 'free service,' and that is doing very
well.
We continue to look at opportunities around the world. We launched our first
Latin-American venture in Brazil; we will have Mexico and Argentina coming up
throughout the summer; and we are in Japan, Australia, Hong Kong, and continue
to look at some of the major markets which we're not in, and feel very good
about that from the ISP standpoint.
I would also remind you that we have two very strong Web brands worldwide -- ICQ
and Netscape -- and we're seeing real strength in those, as well. So, if people
don't have our ISP we do have another relationship we can have with them. I
think it was interesting in the Brazil market where we're just getting started
as an ISP, we've got close to 3 million registered users of ICQ there, so it's
been very strong for us.
The announcement of Netscape 6.0 just under two weeks ago at Internet World went
very well. There seemed to be a lot of enthusiasm, both in terms of the
innovation Netscape 6.0 was bringing, as well as sort of the flexibility that
Gecko would enable for Web applications.
I think we're close to a million people who have downloaded Netscape 6.0, which
is quite encouraging given that it is still in a preview-release stage with
relatively limited marketing. So I think the initial buzz on 6.0 is good, the
initial downloads are good, and, as we move forward with Netscape 6.0 and Gecko
we think there are some interesting opportunities.
I should note that the next-generation Netscape is focused less on the PC
platform, where Microsoft has a stranglehold, and more on some next-generation
appliances. And that's part of the reason we demonstrated the Gateway appliances
at the Internet World.
We think there is an opportunity for a fresh start with Netscape as we think
about some of those other appliances. So I think it's a little different than it
might have been a few years ago when people were talking about 'browser wars'
and counting downloads. We're much more interested in the strategic design wins
in terms of developers and hardware companies and so forth that really try to
embed these Netscape technologies in their appliances. And, as we show with
Gateway, there really are some interesting possibilities that emerge there.
Q: When do you think you're going to see sort of a mass migration of music on
the Internet, where consumers will have a wide selection from which they'll be
able to download and purchase from AOL and the other platforms?
A: We think it could happen relatively quickly, because there is growing
interest in digital downloads. It's important to note that when television came
along and people predicted the demise of movie theaters, and the VCR came along
and people said that people will never watch television, new technologies do
tend to be incremental. I think there are enormous benefits that we can tap into
in terms of digital downloads and different kinds of business models and
different kinds of convenience, particularly across different devices.
One of the real problems now is this proliferation of playback devices: you can
use your CD ROM on your PC, your CD player in your car, or maybe a Walkman you
carry with you, and of course your stereo at home; and finding the right CD at
the right time in the right place is kind of a hassle, so there are some
convenience benefits. There are some different business models that could
emerge.
My own expectation is that 10-20 years from now a lot of people are going to
still be buying music the way they're buying it today. This is really an
incremental opportunity that will get layered on the way the business works
today, and I think it's going to happen at a rapid pace. And I think AOL Time
Warner is somewhat uniquely positioned to jump-start it.
If you look at AOL having the proprietary client and a billing relationship with
the customer, it gives us an important contribution to this process, because it
really does give us the ability to embed a security system into our software. We
do know who our members are and we do have a billing relationship with them --
indeed, we have a credit card on file -- so we solve many of the problems that
people are looking at, in terms of making this a robust business.
Q: Could you give us some idea about how you monetize the AOL Anywhere
initiatives?
A. One, is making our services more valuable -- and we do get subscription fees
and we price accordingly, based on what services people have. Two, some of them
will be robust enough that they will be separate services which will have
charges unto themselves. Clearly, it is yet another platform for our e-commerce
and advertising partners.
Finally, of course, we have other businesses under the new AOL Time Warner
Company, which I think will be very appropriate and very strong through that
channel. And, again, you really provide the platform for them to capture the
value.
It really is about how you connect these things together to create a
fundamentally different, more convenient and more engaging, and therefore a much
'stickier' kind of experience. It's not just about each of these devices as
standalone things; I think that's going to fade as sort of the focus people
have.
As Wayne Gretzky said, "In hockey, you've got to skate to where the puck is
going." Where the puck is going is people integrating these devices. And we
think that the ability to take an integrated service and distribute it through a
wide variety of tightly-coupled devices so things really are super convenient,
affordable and reliable and so forth, is the future.
And we think AOL Time Warner is somewhat uniquely able to achieve that, both
from a consumer perspective -- by connecting the dots -- and also from a
creative-artist perspective; that we have a distribution system that really
expands all these different platforms and really can distribute their product in
a lot of different ways. And that's going to be increasingly important.
So, when we talk about AOL Anywhere, of course there are revenue opportunities
as we think about add-on products and services, but it's also driven by a
strategic sense that over the next five years the next Internet revolution is
going to not just be about narrow-band PCs, but about many devices connected to
many networks, and accessing common services so people don't have to keep
reinventing their personas. That's really where the sweet spot is, we think, for
the AOL Time Warner Company.
Q: Could you discuss the sustainability of 32% growth in advertising and
e-commerce?
A: We just had a tremendous quarter in terms of sequential growth in
advertising, as you pointed out. I think we did have a little bit of a spike of
this quarter; this was just a tremendous quarter -- a number of transactions
came through to us. I think we'll still see strong sequential growth going
forward; maybe not at quite the same rate that we enjoyed this quarter, overall.
Q: Any time you put two large companies together there are some things that sort
of get away in the process. I'm wondering what procedures are in place to ensure
good coordination?
A: We're trying to focus both companies on executing their existing businesses
and not taking their eye off the ball, and I think the results we reported today
and the results Time Warner reported last week demonstrate that both companies
are doing a good job at that, while simultaneously really reaching for the stars
and trying to understand what the real transformational opportunities are.
We have a lot of ongoing interaction: I talk to Jerry Levin either on the phone
or e-mail or instant messaging every day, and we see each other frequently. Bob
and Jerry see each other frequently, and Bob and Dick, and Dick and I, and Mike
and Jerry. So at the top level of these companies, there really has been a lot
of coordination. I think we've really gotten to know one another better, and
that's very important as we build this new company.
We've also made a lot of progress in articulating some of the core strategies
that we think are going to be transformational. As we've said in the past, we
are taking this in a walk-before-you-run mode; we do expect to close on schedule
in the fall. It's still six or seven months away, and we want to use that time
as well as we possibly can to make sure we really think through all the
different possibilities.
Bob continues to have a weekly operating committee meeting at AOL, and the kinds
of issues that we're focused on, in terms of running our businesses, continue to
be discussed, as well as the issues that relate to the Time Warner businesses.
And there's a lot more interaction between our group and their group, and Bob
and I and others are spending a lot of time getting to know the other's
business. Yesterday we were in Atlanta with Ted Turner and the CNN operation; a
week or so ago I was in L.A. with Warner Bros.; there's a lot of that kind of
interaction going on. I think the process is going really quite well.
The more we meet the more we realize that we have in many ways a common vision,
because both companies are focused on consumers, and that makes integration a
whole lot easier. Then it's really a matter of figuring out which assets each of
us has, and how you use those assets together to really improve the experience
for consumers, and how we monetize those relationships.
Considering music, we do come at it from somewhat different perspectives. The
challenge for Warner Music is to expand their business, expand their copyright,
and build new artists. They've done that, particularly in this quarter, through
the merger with EMI, which gives them a much stronger global footprint and a
much wider array of copyrights. And they continue to build that business and run
that business.
We come at it from a different standpoint, bringing assets like Winamp and
Spinner to bear, and saying, "How can we create new digitally-based
opportunities?" So they have to continue to run their business and we have to
try and figure out how to invent new businesses and find common ground between
those two; and that's exactly the process we're in now with music, and the
process we're in with other aspects of the Time Warner family of brands. There
are tremendous opportunities and, obviously, we want to make sure they're
additive opportunities, so we continue to build all these different businesses
as standalone businesses, but really seek the linkages, the connections, the
synergies, across these different businesses.
Q: Can you give us some sense of how we should be thinking about the
subscription line opportunities as you add incremental features, especially with
AOL Anywhere and AOL TV?
Also, if you could talk a little bit about how you're seeing the opportunity in
Europe for wireless devices.
A: In terms of the subscription business, you really hit on something which I
think is key to the future. Like the move from the TV set in the household to
the TV for every member of the household, we're seeing the same thing happening
with the PC.
As you know, we now give you seven shared accounts in one membership. The only
caveat is only one person can be on at a time. We're beginning to see the first
indications that people want to sign on simultaneously and that is obviously
very good news for us because it means there's now multiplication of existing
base -- sort of reproductive rights, if you will -- so we're building those
sorts of features into the next version of AOL.
As you look at the other devices -- AOL anywhere -- we're thinking about the PC
as sort of the hub of the wheel with a lot of spokes coming off it. We think
that will not only happen with wireless, but we'll pick up some of that same
sort of spoke-and-hub relationship with the TV going back to the PC. And, again,
we are designing this service to take advantage of that.
We think the consumer is going to pay AOL to put together all the pieces of the
puzzle -- access with front ends, with picking content, with instant message,
with all these things -- and they're looking to us to bundle the rest of it and
make it seamless and easy to use.
On the wireless point, we do agree that wireless is increasingly important, and
we agree that the dynamics are a little bit different in each region around the
world. There has been a lot of consolidation in the market, so it's no surprise
that the consolidators there are articulating a mobile-centric strategy.
I would say that some of that is rhetoric. I think even they will at least
privately acknowledge that this is not, ultimately, a mobile business -- this is
an anywhere, anytime, any device, any network business, and you've got to knit
these things together in seamless ways. And there may be some ways we can work
together with some companies that might not be evident, based on some of the
rhetoric out there.
I do think, when it's all said and done, these things are going to knit together
and it's not going to be PC-centric or Internet-centric or mobile-centric or
TV-centric; it's going to be consumer-centric. And that's what we're trying to
do with AOL Time Warner.
When the carriers -- particularly during the acquisition phase -- find these
kind of prices, carriers want to stimulate demand and get more usage in their
networks overall. And one of the things that we can bring is a great demographic
customer, one that uses these appliances greatly, and that we will drive
incremental usage and demand on networks, which will drive more minutes for them
overall. So our demographics and our usage characteristics of our customers are
the exact thing that's going to help drive a relationship overall.
Q: 62.4 million ICQ users, 75 minutes a day; these are pretty huge numbers. I'm
wondering if you can discuss with us the impact it may have had now that you've
started to sell that space? How are you going to monetize those customers and
that platform over time?
A: Although we've got pretty impressive numbers considering how new ICQ is, the
major focus there has been on continuing to build the relationships. We have
been making the client more robust, more secure, adding a lot of the benefits
that the AOL product can add. I think ICQ, like Spinner, Winamp and even AIM,
will have dual duties: one is to be their own free-standing business, and the
other is to be part of a greater and larger strategy for the company, as Steve
talks about knitting together communities and bringing them together.
What we do know about communications is that is a very "sticky" application; it
has enormous community. Contrast the time spent with ICQ to some of the Web
search portals and you get an idea of how much stickier the communications
business is. So I think it's going to be an important growth engine for us in
the future. What's also nice about it is it has more of an international flavor
and it tends to be younger: that's yet another audience segment for us to sell
and for us to put in the mix.
We did say overall that our Web-based brands reached a record of $138 million of
advertising revenue this quarter. That was strong growth over last quarter, but
it wasn't significantly above our overall growth in advertising rates. So it was
important, but, frankly, we saw across the board, across all brands, strong
growth in advertising/commerce revenues.
Although we are trying to successfully monetize that and we expect that to
continue, it's not just about commerce; it really is also about using these
messaging platforms to jump-start communications businesses. Either we can do
them ourselves, or we can do it through partners, and we're considering all the
options.
There really is a telephony business that we think is very important there, and
we also believe it is important to connect the dots, as I said before, and with
instant messaging it's a great example. People who are starting to use instant
messaging and starting to rely on instant messaging and have their Buddy Lists
on their screen all the time when they're at work or at home, even at school,
are starting to say, "Why can't I get that Buddy List on my cell phone?" or "Why
can't I get that Buddy List on my TV?"
So, having these assets -- not just the technologies but the active customer
base -- is going to be increasingly important as part of our Anywhere strategy,
as well as a very significant opportunity as we think about telecommunications.
Q: When you talk about introducing ICQ and using it behind the corporate
firewall, it suggests that you're going to open a new space that AOL has long
wanted to get into, which is the corporate market. Can you talk about the
integration between ICQ and AOL, instant messaging, especially in the context of
the Buddy List that we see in Navigator?
A: We are designing all our technologies to make sure that we can interconnect
things in the way that is seamless when and if we decide that that's
appropriate. Right now we think there is a benefit in having a multi-brand
strategy, multi-community strategy, with AIM and ICQ being separate, but that
might change down the road. We certainly have built the technological bridges to
enable that to happen.
We do believe that the instant messaging service is something that will become a
24-hour-a-day kind of service for lots of people, so it isn't just about homes
or offices or school or cars or what-have-you -- it's really a little bit of
each. And having two brands that can do that is important. Netscape 6.0
integrates some of the AOL messaging capability with, essentially, a
private-label branding for Netscape, and it's done in a very seamless fashion as
far as our site we're offering.
This really, I think, brings the benefits of this kind of capability to a whole
new audience. We're very excited about that and we're looking at other
opportunities to do that kind of integration. We do think messaging is a big
opportunity, not just text messaging the way you see it today, but voice and
other things that will increasingly develop over the next few years.
Just to be real clear here, particularly with the Time Warner merger, I should
be very clear that we're focused obsessively on the consumer market. We think
the consumer opportunity on a global basis is huge, so we're not really fancying
ourselves as being a corporate provider. We think there are some partnerships we
have that enable us to play in those markets, but the anchoring strategy for AOL
and Time Warner really is a consumer-centricity. Indeed, that was one of the
things that was exciting to us as we thought about bringing together AOL and
Time Warner.
Both companies really have similar kinds of focus, similar kinds of mentality;
really a lot of consumer products and services, whether it be watching things on
a PC screen, or watching things on television or in a movie theater, or reading
a magazine, or listening to music, where they really touch the lives of hundreds
of millions of people in really magical ways. And both companies understand that
and both companies are excited about the possibilities as we move forward as a
combined company.
With that, we'd like to thank you for your time and your attention and your
interest, and we look forward to talking to you in the future.
* * * * * * * * * * * *
AOL Time Warner Inc., together with Time Warner Inc. and America Online, Inc.,
filed with the Securities and Exchange Commission a preliminary joint proxy
statement/prospectus regarding the proposed business combination transaction
referenced above. In addition, AOL Time Warner, Time Warner and America Online
will prepare and file with the Commission a definitive joint proxy
statement/prospectus and other documents regarding the proposed transaction. You
are urged to read the definitive joint proxy statement/prospectus, when it
becomes available, because it will contain important information. The definitive
joint proxy statement/prospectus will be sent to stockholders of Time Warner and
America Online seeking their approval of the proposed transaction. You may
obtain a free copy of the definitive joint proxy statement/prospectus (when it
is available) and other documents filed by AOL Time Warner (as well as by
America Online and Time Warner) with the Commission at the Commission's web site
at www.sec.gov. The definitive joint proxy statement/prospectus and these other
documents may also be obtained for free by America Online stockholders by
directing a request to: America Online, Inc., 22000 AOL Way, Dulles, VA 20166,
Attention: Investor Relations, telephone: (703) 265-2741, e-mail:
AOL IR@aol.com, and by Time Warner stockholders by directing a request to Time
Warner Inc., 75 Rockefeller Plaza, New York, NY 10019, Attention: Shareholder
Relations, telephone: (212) 484-6971, e-mail: investrequest@twi.com.