(Reuters) - AOL Inc on Wednesday said its quarterly profit declined, with its stock price falling 22 percent as it missed earnings expectations due to the cost of restructuring its digital and media entertainment businesses.
Net income dropped 64 percent to $9.3 million because of costs related to workforce reduction and a $10 million impairment charge for software at the division that operates its legacy subscription dial-up services.
First-quarter earnings per share of 34 cents fell far short of the average analyst estimate of 45 cents and overshadowed growth in revenue and advertising sales. In the year ago period adjusted EPS came in at 41 cents.
“The first quarter is weak, and we think the market is overvaluing the quarter, rather than looking at the strategic vision of AOL,” said Laura Martin, an analyst with Needham and Co.
AOL executives said on a conference call with analysts that the first quarter tended to be soft because of seasonality.
Still, AOL said first-quarter revenue rose 8 percent to $583.3 million, topping estimates of $577.7 million, according to Thomson Reuters I/B/E/S.
Revenue was boosted in part by a 43 percent surge in ad sales through AOL’s automated electronic exchange to $230.8 million, helped in part by the acquisition of video advertising platform Adap.TV.
AOL, which owns the Huffington Post website and the TechCrunch blog, has been investing in advertising, especially in the so-called programmatic side, referring to the machine-buying and selling of digital advertising.
Nomura analyst Anthony DiClemente wrote in a note to investors that AOL’s mobile traffic and display pricing were improving. But there was still no clear sign of stable growth in pricing for ads bought by automation and improved operating profit margins. The company also needed to find more ways to generate revenue from its media properties, he said.
Part of the problem is that AOL’s ad technology division reported an adjusted operating loss before depreciation and amortization of $3.5 million, wider than the $2.5 million loss in the same quarter last year. AOL said it was investing heavily in this area.
On Tuesday AOL said it would pay $101 million to acquire Convertro Inc, a platform that helps advertisers manage spending budgets across different media.
In an interview with Reuters, AOL Chief Executive Tim Armstrong said he sees upside in automated buying and selling. “We believe that Madison Avenue will get mechanized over the next decade and so will the content business.”
The company has been unloading properties, including Patch, its network of local websites, and has unveiled a one-stop advertising platform aimed at changing the media-buying process for digital advertising.
Advertising is an important revenue stream for AOL, and its growth is critical to its overall performance, especially as subscription revenue from its dial-up service slips away.
“Our view is that 2014 is going to be a good year for AOL,” Needham’s Martin said, citing the company’s video, mobile and automated ad platform business.
AOL shares closed down $9.05 at $34.85.
Additional reporting by Soham Chatterjee; Editing by Simon Jennings, Jeffrey Benkoe and Chizu Nomiyama