AOL posts loss on Bebo charge, revenue drops

NEW YORK Wed Aug 4, 2010 11:10am EDT

A woman walks out of AOL offices in New York, November 19, 2009. REUTERS/Shannon Stapleton

A woman walks out of AOL offices in New York, November 19, 2009.

Credit: Reuters/Shannon Stapleton

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NEW YORK (Reuters) - AOL Inc (AOL.N) on Wednesday posted a major loss in the second quarter due to a goodwill impairment charge related to its sale of social networking site Bebo and a precipitous drop in advertising revenue.

The company warned in a regulatory filing that it expects total revenue and operating income to decline in the near term and foreseeable future as it continues to restructure its advertising business.

Shares initially fell about 3 percent in morning trading before recovering as investors were left uncertain as the company lost ground even as the wider advertising market has recovered.

AOL's revenue fell 26 percent to $584.1 million as advertising declined on all fronts as did its dial-up subscription fees. Analysts had on average been expecting revenue to come in around $602.1 million, according to Thomson Reuters I/B/E/S.

Advertising revenue declined 27 percent to $260.2 million.

U.S. online advertising spending in the second quarter is estimated to have grown 11.4 percent from a year ago, according to analytics company eMarketer.

AOL Chief Executive Tim Armstrong remained bullish about the prospects of the company despite the weak display advertising numbers, a key plank of his management team's strategy.

"There's a lot of stuff that's happening at the company that I would point to that are successful starting blocks for what AOL needs to do in the future," he said on a conference call with Wall Street analysts.

In an interview, Armstrong said the company was still in turnaround mode as it readied itself for more advertising dollars to follow the growing number of consumers online.

"We may or may not be able to meet Wall Street expectations for the rest of the year, but we will meet our expectations for making AOL a healthier company," Armstrong said.

"I would expect us in 2011 to start getting on a very stable ground and track record of growth."

BEBO CHARGE

Net loss during the quarter was $1.06 billion, or $9.89 a share, compared with a profit of $90.7 million, or 86 cents a share a year ago.

AOL recorded a goodwill impairment charge of $1.4 billion during the quarter following a goodwill impairment charge test. The company's net assets had increased due to a significant deferred tax asset following its sale of Bebo, which had coincided with a decline in its share price.

AOL sold Bebo to Criterion Capital Partners LLC for around $10 million in June, just two years after it had paid $850 million for it.

Excluding the charge, AOL's profit would have been 66 cents a share.

Credit Suisse analyst John Blackledge described the results as mixed saying while revenue had missed the company's cost structure had improved during the quarter.

AOL was spun off by Time Warner Inc (TWX.N) late last year after appointing Armstrong, from Google Inc (GOOG.O) a few months earlier.

Armstrong said the company's current search advertising contract with Google was due to expire on December 19, and said the company was in talks with various partners and a deal would be announced closer to that date.

AOL's shares rose 35 cents, or 1.6 percent, to $21.49 in morning trading the New York Stock Exchange.

(Reporting by Yinka Adegoke, editing by Maureen Bavdek)

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