AOL Beats Forecasts by 2 Cents, Announces Deal to Invest $800 Million in Gateway - TheStreet

AOL Beats Forecasts by 2 Cents, Announces Deal to Invest $800 Million in Gateway

A record number of new subscribers and surging ad revenues were cited for the jump in results.
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Citing a record number of new subscribers and surging advertising revenues,

America Online


reported late today that its earnings more than tripled, exceeding Wall Street analysts' expectations by 2 cents.

AOL also surprised Wall Street by announcing it will invest $800 million over two years in



, a top personal-computer maker. Gateway will install AOL's Internet service upon its PCs while AOL will run the PC maker's Internet service, which has more than 600,000 subscribers.

AOL's stock rose as high as 121 in after-hours trading before slipping back to 117 1/2 on Instinet after the Gateway deal was announced. In anticipation of the company's quarterly report, which was released after the bell, AOL's stock rose 2 3/4 to 118 today.

The nation's top blue-chip Internet company reported net earnings of $184 million, or 15 cents a diluted share, for its first fiscal quarter, up from $50 million, or 4 cents a diluted share, in the comparable quarter for 1998. A consensus of Wall Street analysts polled by

First Call/Thomson Financial

called for the Dulles, Va.- based company to earn 13 cents a share, although the "whisper" number floating about today was at 15 cents a share.

Advertising, commerce, and other revenues -- all figures most analysts were keenly watching to see if AOL can generate revenues beyond circulation -- came in at $350 million, which was double the $175 million in the 1998 first quarter. Overall, first-quarter revenues grew by 47% to $1.47 billion from $999 million in the 1998 first quarter.

Meanwhile, AOL said it added 1.1 net new members worldwide, while


, which AOL owns, added 378,000 members, bringing its total subscription total to 575,000 members. Overall, at the end of September, AOL had a total of 18.7 million members and 2.2 million

CompuServe Classic

and Compuserve 2000 members.

Not all analysts were pinning their entire interest to AOL's ability to generate other revenues.

"AOL once again shows it's able to uncover powerful growth answers for its business segments," said Frederick W. Moran, an analyst with

Jefferies & Co.

, who gives AOL a buy rating. His firm has not done any underwriting for AOL. "While we think it's clearly an exciting component, we shouldn't ignore the point that their operating core is showing tremendous growth."

Speaking to analysts during a late-afternoon teleconference call with analysts, Steve Case, AOL's chairman and chief executive, said, "More than ever, the numbers speak for themselves." Case added that the company has shown increasing abilities to generate revenue and expand into new areas. He also cited the "huge franchising" of the company's Instant Messaging unit, which allows people to easily communicate with each other via their computer.

Essentially, Case said the company plans to stay the course, a path he says won't move the company toward changing from a premium site that charges a $21.95 monthly fee to a free site in the U.S.

"This quarter's results clearly demonstrate America Online's leadership and growing earnings power," Case said in a press release issued before the conference call. "Our core AOL service is becoming more and more central to our members' lives, and we are achieving added growth through our expanding roster of interactive brands, which now reach eight out of 10 U.S. Internet users. Approaching the Internet century, we see new opportunities for AOL to extend its leadership in the emerging world of multiple devices and high-speed access networks."

Of the $800 million that AOL will invest in Gateway over the next two years, $180 million will be in AOL stock.

As part of the agreement, AOL will be loaded onto Gateway PCs, which, during a teleconference with analysts late this afternoon, Case called "a major step for us" because it gives AOL immediate access to potential new Internet users.

Gateway's stock closed up 5 1/8 points to 52.

Moran of Jefferies & Co. agreed with Case, calling the Gateway deal "one more way for AOL to attract new subscribers, which it has shown a great ability to already do."