America Online Inc. yesterday said it more than tripled its quarterly earnings and has struck a wide-ranging deal with PC maker Gateway Inc., including an $800 million equity investment.
AOL announced that fully taxed net income for its fiscal first quarter ended Sept. 30 was $184 million (15 cents per share), up from $50 million (4 cents per share) during the same quarter last year. The results beat Wall Street analysts' predictions of 13 cents per share.
Revenue for the Dulles-based company's first quarter reached $1.5 billion, up 47 percent over last year's quarter, according to the company.
AOL, the nation's largest online service provider, also said it will invest $800 million in cash and stock over two years in Gateway of San Diego, giving AOL a 5 percent stake in the country's largest seller of personal computers to consumers.
Under the terms of the deal, AOL will give Gateway $180 million in stock and Gateway will spend $85 million to market software and Gateway products on AOL's sites.
AOL will operate Gateway's Internet service provider, Gateway.net.
"It gives us added flexibility as we move into the 'AOL Anywhere' world," said AOL chief executive Steve Case in an interview.
Case said that as its new partner develops portable information appliances, AOL will be able to more quickly advance its plan to offer services through devices other than the computer.
The two companies plan to introduce these devices in the next few months, although they would not give specifics. They also plan to jointly offer high-speed access to the Internet.
AOL's service will be pre-loaded on all Gateway PCs and AOL will have a significant presence in Gateway's national chain of stores. About 85 percent of people in the United States are within an hour's drive of a Gateway Country store, the companies said.
Case would not break down the terms of revenue-sharing between the two companies. He said the deal would not affect agreements with other computer makers already in place. AOL currently owns a percentage of only one other such company, eMachines Inc. of Irvine, Calif.
Analysts, while surprised at the deal, which is the first between the two companies, saw it as a strong move on both sides. "The opportunity is easier connectivity [for users] and greater loyalty [from customers], and that clearly leads to advertising opportunities," said Paul Merenbloom, an analyst with Prudential Securities in New York.
AOL also said the company hit a record for first-quarter subscriber growth, adding nearly 1.1 million users worldwide, giving it a total of 18.7 million. Highlights of the quarter included the launch of AOL's 5.0 version, which has been downloaded by 3.6 million subscribers. About 1.9 million users have downloaded AOL's new online appointment and event calendar, which president Bob Pittman said in a conference call is the fastest adoption yet of any new AOL service.
AOL expects to take a $30 million pretax charge in association with the Gateway deal in the quarter when the transaction closes, and Gateway expects to take a pretax charge of $26 million in the fourth quarter.
AOL shares rose $2.75 yesterday to close at $118 on the New York Stock Exchange.
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