RealTime IT News

AOL's Big Day

You have to go back to 1997 to find a quarter in which America Online's earnings didn't beat Wall Street estimates.

Yet as recently as June some analysts expressed disappointment over AOL's subscriber growth -- still its bread-and-butter -- hinting that trouble lay ahead for the Internet's dominant player as it faced challenges from free ISPs, Microsoft (MSFT) and high-speed access providers such as Excite@Home (ATHM).

Now it looks as though even the naysayers have been silenced in the wake of AOL's latest stellar earnings report, which showed record Q1 revenues, impressive subscriber growth and increasing e-commerce revenues.

In the quarter ended Sept. 30, America Online (AOL) posted revenues of $1.47 billion, a gain of 47 percent over Q1 last year. Its net income of $184 million, or 15 cents per diluted share, nearly quadrupled last year's 4 cents per share and beat analysts' consensus estimates of 13 cents per share.

Unlike in July, when AOL shares fell after the company announced better-than-expected earnings, AOL was up nearly 5% Thursday afternoon, trading at 122 13/16. What's the difference between then and now? I see two factors at work: 1) The market is no longer looking for the dark cloud in AOL's silver lining, and 2) AOL didn't couple its July announcement with the kind of joint partnership it announced late Wednesday with PC manufacturer Gateway (GTW).

Under terms of the deal, which should go into effect before January, AOL's Internet service will be offered on all new Gateway PCs. AOL also will invest $800 million in Gateway over the next two years, while Gateway promises to spend $85 million advertising its products and services on AOL's various Internet properties.

It's a powerful alliance that benefits both companies. For AOL, it means getting its brand in front of the millions of new PC buyers who, by definition, are not yet on the Internet. It also means a shot at the 5 million current Gateway customers, many of whom will buy another Gateway PC through the company's popular trade-in program.

For Gateway the agreement, of course, means an alliance with and an investment by the most valuable Internet partner a company could have. Further, it gives Gateway an opportunity to split recurring revenue streams with AOL by selling software through a joint online store and AOL-enabled non-PC appliances through its retail outlets.

It's deals like this, with other high-tech powerhouses that bring value to the table, which have allowed AOL to build on its unprecedented Internet business. The company's next blockbuster? A broadband partnership with AT&T (T).


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