(Adds analyst comments, details on scope of losses)
By Jennifer Saba
May 8 AOL Inc shares tumbled 10 percent
on Wednesday after it posted another loss in its content group,
reviving concerns that the company's profits were still mostly
coming from a shrinking dial-up platform.
The stock's plunge was the second-worst decline in 18
months, and follows what had been a 67 percent rise over the
"The core issue with this company is can they make content
profitable?" said Ben Schachter, an analyst with Macquarie
Research. "What you see every quarter is the only thing making
money is the membership group. They are clearly going in the
right direction, but we want to see more progress."
For the past several years, AOL has been trying to transform
itself into a media destination with a stable of sites like the
Huffington Post and Patch. It's a change from the days when it
was best known as an Internet access business with free-trial
CDs that clogged mailboxes.
AOL Chief Executive Tim Armstrong has invested heavily in
content, including plowing well over $100 million into Patch, a
group of hyperlocal websites that covers neighborhood news and
Even with all of that spending, the legacy subscription
service is still the most profitable part of the company. The
membership group, which includes subscriptions, posted operating
profit of $146.4 million in the quarter.
AOL's media sites turned in an operating loss of almost $5
million. Those sites, which include Patch, Huffington Post,
Engadget and TechCrunch, lost almost $17 million in the year-ago
"Patch is still a money losing proposition," said Ron Josey,
an analyst with JMP Securities, who estimated Patch lost $100
million last year.
Armstrong reiterated on a call with analysts he expects
Patch to be profitable in the fourth quarter.
"If they can get to break-even by fourth quarter, I think
that is a win," said Josey.
DISPLAY AD REVENUE RETURNS TO GROWTH
Some encouraging trends have emerged. Display ad growth was
a bright spot, Macquarie's Schachter said. The ads, big splashy
campaigns often featured prominently on websites, are an
important benchmark for AOL because they command higher prices
and better margins.
Yahoo Inc, a competitor, reported that
first-quarter display ad revenue fell 11 percent.
Overall advertising revenue for AOL increased 9 percent to
$359.2 million, including a 6 percent gain in domestic display
But it also reported a slowdown in network advertising - ads
sold across platforms, sometimes for cheaper prices. That
business was up 10 percent in the first quarter versus 31
percent in the fourth quarter last year.
"A lot of people are concerned on the future growth rates on
its network (business)," JMP's Josey said.
Armstrong said in an interview that AOL focused its sales
group on "higher value" display advertising, rather than on
third-party network advertising.
Total company revenue increased 2 percent to $538.3 million,
missing analysts' expectations of $542.1 million, according to
Thomson Reuters I/B/E/S.
Net income rose 23 percent to $25.9 million, or 32 cents per
share, and met analysts' expectations.
Before Wednesday's report, AOL shares had soared 67 percent
in the latest 12 months, just slightly underperforming Yahoo.
(Reporting by Jennifer Saba in New York; Editing by Jeffrey
Benkoe and Nick Zieminski)