AOL's Deal Buys Revenue Gains, But Patch Hurts Profits

Fewer Ads on AOL Sites Sold Through Portal's Ad Tech Biz

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AOL returned to double-digit ad growth in the third quarter thanks to the ad-tech side of its business, which now includes, acquired earlier this fall.

Total ad sales were up 14% in the third quarter to $386.9 million, driven by a 32% gain at its third-party ad network, part of the tech side of what CEO Tim Armstrong calls AOL's "barbell strategy," where the company is pursuing both real-time automated ads as well as direct-sold brand ads on sites like and The Huffington Post.

Total revenue, including AOL's legacy subscription business, grew 6% to $561.3 million, beating analyst estimates and sending the stock up more than 8% in morning trading.

Tim Armstrong
Tim Armstrong

AOL's owned sites contributed $236.9 million in revenue from search and display advertising, compared to $149.1 million added by the network of third-party sites on which it sells ads, increasingly through automated means like real-time auctions.

Without, AOL Networks revenue would have only risen by 17%. Instead added $17.6 million in revenue to AOL and was "slightly profitable," said AOL CFO Karen Dykstra. AOL only reaped revenue from in September, but without that month of revenue, AOL's profits would have fallen into the red.

But the growth of the tech side of the business shows AOL is shifting from direct, people-sold advertising to automated trading of ads around the web.

AOL's ad tech division is gaining on the company's "Brand Group," of owned-and-operated sites. Sales at those sites alone grew 9% to $192.5 in the quarter, while AOL Networks grew 19% to $188.7 million. At this rate, the tech side will soon overtake brand advertising at AOL.

At $149.1 million, revenue from ads sold on third-party sites surpassed the $141.9 million from display ads sold on owned properties.

AOL is selling less of its owned-and-operated inventory through its ad tech business AOL Networks, Mrs. Dykstra said Tuesday morning during the company's earnings call. She didn't explain why that is, such as whether AOL is pulling its inventory from the ad tech business to sell directly or whether advertisers are steering away from it.

Should the trend continue, the contrast between business lines should become starker as more ad tech revenue will flow in future quarters thanks to its $405 million acquisition of video ad exchange

In the wake of August's layoffs at AOL's headcount-dependent hyperlocal news network Patch that resulted in $19 million in restructuring costs and $25.0 million in "non-cash asset impairments," net income plummeted by 91% to $2.0 million. Somehow AOL CEO Tim Armstrong discussed Patch positively on Tuesday, saying that the business has "improved revenue on key talent" and expects "run-rate profitability by year's end."

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