AOL Returns to Profitability, but Stock Drops 10%

WASHINGTON — Despite a return to profitability and a promising new venture in Japan, America Online Inc. saw its shares fall more than 10% on Wednesday after the computer online services company reported earnings that disappointed some Wall Street investors.

The Vienna, Va.-based firm said it earned $15.1 million in the first three months of the year, contrasted with a net loss of $3.3 million during the same period a year ago. America Online’s revenue soared to a record $312 million, up from $109 million in the same quarter last year, as it continued to add subscribers at a furious pace.

Although its profit was slightly higher than many analysts had expected, AOL’s shares--which are among the most heavily shorted on Wall Street--fell $7.25 to $62.75. Many investors were apparently hoping for even better results.

Still, many analysts insist that online growth will remain strong and that AOL, with more than 5.5 million subscribers, will continue to lead the onslaught.

“AOL is very good at managing [Wall] Street’s expectations,” said Lou Kerner, an analyst for New York brokerage Merrill Lynch Inc. “They like beating the estimates by sending expectations that are [overly] conservative. . . . But if you are an investor with a long-term outlook, you don’t care if they add big profits this quarter or next quarter.”

America Online also announced Wednesday that it had cemented a $56-million online joint venture with Mitsui & Co., a Tokyo-based international trading firm, and Nihon Keizai Shimbun Inc., publisher of Japan’s leading business newspaper.

AOL will own half the partnership; Mitsui 40%; and Nikkei, the paper’s parent, 10%. The venture will be called AOL-Japan, executives said.

AOL Chairman Steve Case said the service will provide Internet access and online content similar to AOL’s U.S. service. While declining to predict the potential Japanese market for AOL, he said he believes his company has an opportunity to parlay its colorful computer graphic interface into a major force in Japan because existing online services there “are providing a dated, mostly text-based service.”

In addition to its joint venture in Japan, America Online announced a new pricing plan in the U.S for heavy AOL users. The company said it will charge $19.95 for 20 hours of service a month and $2.95 for each additional hour. It will continue to offer its standard pricing plan of $9.95 for five hours and $2.95 for each additional hour.

Experts said the pricing plan is an effort to blunt the impact on AOL of other Internet access providers, whose ads point out that 90 minutes of daily online usage at AOL can cost more than six times as much as the $19.95 a month charged by Netcom Online Communications Services, MCI Communications Corp. and AT&T; Corp.

Some expect that AOL will eventually be hurt badly by the availability of inexpensive, direct Internet access from the phone companies and others and the simultaneous growth of the World Wide Web. So far, though, many of those venturing into cyberspace still find AOL’s broad content, user-friendly organization and highly functional “chat” technology to be more appealing than the cheap but chaotic Web.

Despite the bevy of new announcements, Case said Wednesday that his company is entering a “slightly slower seasonal period” in which the company will “more carefully . . . manage customer” growth in order to focus on improving its quality of service.

But the company faces challenges as it moves into international markets and heavy-usage pricing.

AOL has only about 100,000 subscribers overseas, compared with about 2.5 million for CompuServe. And at home, both AOL and CompuServe could find themselves facing a rejuvenated Prodigy Services Co. if executives of the nation’s No. 3 online service company succeed in acquiring it from its current owners, IBM Corp. and Sears, Roebuck & Co.

IBM and Sears have invested more than $1 billion in Prodigy, but reportedly entered talks with Prodigy executives after being unable to find an outside buyer for the service, which has lost ground to AOL and CompuServe in the last year.