November 6, 2012 / 12:29 PM / 7 years ago

AOL ad sales, strongest in seven years, boost profit

(Reuters) - AOL Inc AOL.N reported higher-than-expected revenue and profit on the strongest advertising growth the company has seen in seven years.

At the same time, the company said its subscription revenue had its lowest rate of decline in six years.

The advertising and subscription trends are helping boost AOL since its turnaround hinges on the success of getting more online advertising dollars and reducing its reliance on the lucrative but moribund dial-up business.

The advertising revenue high mark - up 7 percent to $340 million - comes as AOL pulled in more dollars from search and from its third party network which includes its successful platform

Even so, AOL reported on Tuesday that third quarter total revenue was flat at $531.7 million, although this was well ahead of analysts’ average estimate of $521.6 million, according to Thomson Reuters I/B/E/S.

AOL Chief Executive Tim Armstrong said in an interview with Reuters that the main focus next year will be on advertising and video, which tend to command higher prices from marketers.

Shares of AOL, which have been on a tear, rising 137 percent year-to-date, closed at $43.70, up 22 percent, on Tuesday after the company released its third quarter results.

“Things look great,” RBC Capital Markets analyst Andre Sequin said. “This company is continuing to make steps in the right direction.”

Throughout the year, Armstrong initiated a number of actions to help goose shares and shore up the company, including selling some of its patents to Microsoft (MSFT.O) for $1 billion and returning those proceeds to shareholders.

Still, there are some troubling signs in the results.

Domestic display advertising, where AOL is making a big effort and has made splashy acquisitions such as the Huffington Post, fell 3 percent in the quarter.

That compares with the overall U.S. display ad market, estimated to grow more than 20 percent to $14.98 billion this year, according to research firm eMarketer.

Google Inc (GOOG.O) and Facebook Inc (FB.O) will have almost 30 percent of total U.S. display ad revenue this year, while AOL will have about 4 percent, eMarketer estimates.

Display advertising includes big, splashy ads on Web pages favored by brand advertisers. Its third-party network that includes AOL’s helps sell ads across other web sites. These types of ads typically are lower-cost than those ads known in the industry as premium display.

“I think while the advertising did perform better at least for this quarter, much of this is due to search having an easier comparison,” said Ken Sena, an analyst with Evercore.

Sena noted that some of AOL’s premium display ads were sold through its third party network, which can drive down the cost of the ad.

“We weren’t exactly 100 percent drilled and focused on the advertising strategy the first half of the year. But we are now,” Armstrong said on a call with analysts.

“I think overall, what you’re going to see is an operational improvement around advertising as we get into 2013.”

Net income was $20.8 million, or 22 cents per share, compared with a year-earlier loss of $2.6 million, or 2 cents per share.

AOL’s earnings per share beat analysts’ forecast of 17 cents.

The company raised its estimate for 2012 adjusted operating income before depreciation and amortization, or OIBDA, to about $400 million from $375 million.

Reporting by Jennifer Saba in New York; Editing by Lisa Von Ahn, Maureen Bavdek, Sofina Mirza-Reid, Dale Hudson and Phil Berlowitz

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