AOL's Armstrong asks investors to bet on tomorrow

Sun Jul 19, 2009 10:53pm EDT

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* CEO sees display ads resurgence in 18 to 24 months

* Says two months away from decisions on capital structure

* To slow the wind-down of dial-up access business

* CEO says would consider Bing search as partner

By Yinka Adegoke

NEW YORK, July 19 (Reuters) - AOL Chief Executive Tim Armstrong said investors will reap the benefit of an online advertising resurgence by 2011 if they hold on to the company's shares after it is spun out from Time Warner Inc (TWX.N) later this year.

That will be a difficult sell to Time Warner shareholders looking at AOL's revenue trajectory over the last three quarters, which has seen steep declines of 20 percent.

Armstrong said it remains unclear when exactly the overall ad market will rebound, but he believes online video and display ads will see a resurgence in 18 to 24 months.

"Advertisers are going to be driving to Internet Road and AOL is a major property on Internet Road," Armstrong said in an interview at his office in downtown Manhattan, though he also acknowledged, "The property needs some work."

The media conglomerate appointed Armstrong, Google Inc's (GOOG.O) former sales chief, in March to run AOL and set him to the task of spinning out the Internet company.

Unlike Yahoo Inc (YHOO.O) and Microsoft Corp (MSFT.O), which seek to compete with Google in Web search, AOL will be a pure-play Internet display advertising company.

That means its revenue will mostly come from companies buying advertisements on its own websites and partner websites -- a business that has been harder hit by the recession than the search advertising market.

The AOL CEO believes the value of its inventory has been hurt by a network-based approach to advertising through its Advertising.com platform, which serves ads to hundreds of websites.

Armstrong and his sales lieutenant Jeff Levick, another ex-Googler, are working to rectify this by separating targeted ads -- which generate higher revenue because they reach specific audience groups -- from the one-size-fits-all approach of network ads. The two had been mixed together previously.

"They mixed the peanut butter and chocolate together," said Armstrong. "In reality you ended up with something that didn't taste very good."

AOL -- whose properties include celebrity news site TMZ, tech site Engadget, plus own brands like AOL Music -- ranks fifth in the U.S. display ad market, lagging Yahoo, MySpace, Facebook and Microsoft, according to comScore.

ON DIAL-UP, M&A

Management is deep in talks with Time Warner about AOL's capital structure based on internal revenue and cost estimates that are still being ironed out.

Armstrong said they are two months away from a decision without giving further details.

"There is debt capacity at AOL but how much depends on the strategy and financial planning and what we invest in," he said.

Citigroup analysts say the market values AOL at about $4 billion and expect it to generate $1 billion in earnings before interest, taxes, depreciation and amortization (EBITDA). They think AOL will be spun off with $1 billion debt on its books.

One cash-cow Armstrong is in no hurry to kill is AOL's dial-up Internet access business, which Time Warner has been winding down. AOL still has 6.3 million subscribers to that business, despite increased high-speed broadband penetration.

"We are being less aggressive about winding down the dial-up business," said Armstrong. "It's not necessarily an investment area, but one where from a stabilization standpoint, or if we offer more products and services, there might be an opportunity."

Last year, AOL was an outside player in the saga of Microsoft's bid for Yahoo. Time Warner had conversations about potentially combining AOL with Yahoo but Armstrong said there are no talks of any such flashy deals going on right now.

"There's no plan to do any major M&A at present. We're more focused on talent acquisition for content and engineering," said Armstrong.

The five areas that AOL is focusing on are advertising, premium content, local information, communications, and a new unit AOL Ventures to put seed money into start-ups.

Armstrong still holds regular meetings with his former employer Google, which has a 5 percent stake in AOL and powers AOL's search service.

Google will be paid for the stake in the coming weeks as part of the AOL spin-off, and the search relationship expires in the fourth quarter of 2010.

Would the ex-Googler consider signing up with Microsoft's new Bing search engine? Armstrong was diplomatic: while describing Google as a great search partner, he said his priority now is to get the best deal for AOL, "Microsoft would certainly be a prime consideration for us," he said.

(By Yinka Adegoke; editing by Tiffany Wu and Michael Wei)

((yinka.adegoke@thomsonreuters.com; tel: +1 646 223 6081)) Keywords: AOL/

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