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Strong advertising growth boosts AOL past 1Q estimates

America Online Inc. (NYSE: AOL) hustled past analysts' estimates in its first quarter Wednesday, raking in $184 million, or 15 cents a share, on sales of $1.5 billion.

Its shares closed up 5 3/4 to 121 ahead of the earnings report.

First Call consensus pegged the world's largest online service provider for a profit of 13 cents a share in the quarter though so-called "whisper" estimates were closer to 15 cents a share.

After watching its stock price slide for more than five months, AOL answered its critics with impressive growth in several key areas.

First of all, the $1.5 billion in sales represents a 47 percent improvement compared to the year-ago quarter when it earned $50 million, or 4 cents a share, on sales of $1 billion.

In the quarter, AOL added another 1.1 million new members worldwide, including a better-than-expected jump of 378,000 CompuServe 2000 members.

Its popular ICQ service ended the quarter with more than 45 million registered users.

By adding a total of 1.1 million subscribers this quarter, AOL now has more than 19 million registered users. And those registered users accounted for almost $1 billion of its total revenue.

$800 million investment in Gateway

In a related announcement, AOL announced that it will team up with Gateway Inc. (NYSE: GTW) to offer Internet service and e-commerce and marketing opportunities.

Under terms of the deal, AOL will invest $800 million in the next two years. In return, Gateway will be featured and aggressively marketed on all its PCs. AOL will also take over control of its Gateway.net service.

Company officials said both companies will benefit from the enhanced e-commerce and marketing opportunities.

Gateway will receive $180 million in AOL stock in the deal and will spend $85 million to market software and Gateway products and services on America Online's brands.

AOL expects to take a pre-tax charge of $30 million in connection with its acquisition of an interest in Gateway.net subscribers in the quarter in which the transaction closes.

Gateway expects to take a pre-tax charge of $26 million in the fourth quarter of this year for a combination of restructuring charges, transition costs associated with the transaction and costs incurred to build Gateway.net infrastructure.

Advertising revenue soars

In the quarter, AOL reported more than $350 million in advertising and e-commerce sales, doubling the $175 million it did in the year-ago period.

As if that weren't enough, AOL also said it exited the quarter with a $2 billion backlog in advertising orders it had yet to place.

"Our growth is accelerating across the board," said COO Bob Pittman in a prepared release. "We are confident that new services, products and initiatives across our brands will continue to build our success in all meaningful markets for interactive services."

Last quarter, AOL earned $156 million, or 13 cents a share, on sales of $1.4 billion.

Not only did AOL add more subscribers this quarter, but those subscribers stayed online longer than they ever had before. This quarter, AOL users spent an average of 55 minutes online daily compared to 52 minutes last quarter.

Operating income jumped 244 percent to $265 million or 18.1 percent of revenue, up from 7.7 percent a year ago. EBITDA rose to a record $386 million for the quarter, a 152 percent increase over a year ago, and EBITDA margins increased to 26.3 percent.

Jim Preissler, an analyst at PaineWebber, had pegged AOL for total sales of $1.44 billion and predicted it might beat the Street estimate by a penny a share.

"We believe AOL will continue to find a balance that can satisfy both near-term investors' expectations, as well as provide enough long-term re-investment to continue to grow the business at a rapid rate," Preissler said in a research note. "We would expect to see this continued "brute-force" strength in operating results reflected in ongoing growth."

Preissler calls the stock his "best pick" and has set a 12-month price target of $215 a share.

The stock hit a 52-week high of 175 ? in April after trading at a low of 25 1/8 last October.

Forty of the 43 analysts following the stock maintain either a "buy" or "strong buy" recommendation.