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AOL's Cash-Flow Fallacy


Its subscription access service will remain a revenue source, but what does that mean in the real world?

Over the course of the last week or so, I've read a number of comments on the impending spin-out of AOL (AOL-WI). Regardless of its bottom line on the stock, nearly all cite the cash flow generated by the company as an underlying asset and positive on the story. And therein lies the problem.

The Form 10-12B documents filed with the SEC are very specific. As a risk factor it notes that "our subscription access service will remain an important source of revenue and cash flow for us in the near term." So what's that mean in the real world?

Take a look at the graph below that plots the company's access subscribers, cash from operations, and capital spending. You'll notice that they're all heading in the same direction.

The single biggest line item on AOL's cash flow statement is depreciation and amortization; not all that uncommon. Most of that comes from capital spending on equipment, and what the risk factors are telling you is that the bulk of that spending is on the access side of the business. The media business is less capital intensive than the old "dial-up" access side of the house. Consequently, as the subscribers decline, so does the capital spending as well as the cash flow associated with it.

Are they on identical trajectories? Obviously not, but that's not the point. You have to believe that AOL can somehow stem the decline of subscribers to accept the cash-flow story as a reason to invest. Yes there's a base level of subscribers below which it's unlikely to fall for simple economic reasons. But is that figure five million? Three million? One Million? None of us knows.

Personally, I don't know of anyone who enjoys their dial-up service and isn't looking for a faster alternative. How about you?
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