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 [email protected] (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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