AOL's Turnaround Turns Into a Tough Slog

Ad Revenue Down Steeply at CEO Armstrong's 'Sick Patient'

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NEW YORK ( -- Need a reminder how tough AOL's turnaround is going to be for CEO Tim Armstrong and his team? Look no further than the company's second quarter, where ad revenue fell just as fast as AOL's dwindling internet access business.

The challenge is to build a profitable AOL based on tools like AOL's mail product, which is undergoing a revamp.
The challenge is to build a profitable AOL based on tools like AOL's mail product, which is undergoing a revamp.
Ad revenue declined 27% from the prior year, coming in at $296.9 million from $407.2 million a year ago. Total revenues overall were off 27% to $584.1 million, short of Wall Street's expected $602 million and down from $791.5 million a year ago.

The company absorbed a huge loss due to a $1.4 billion write-down related to the shutdown of Bebo during the quarter and falling stock price. Mr. Armstrong made it clear that six months after spinning out from Time Warner, AOL remains a "sick patient," but, as always, stressed his confidence in the future, adding that "my personal money is in this company as well."

Mr. Armstrong's challenge is to build a profitable AOL built on ad-supported internet brands such as Engadget and AOL Health and tools like AOL's mail product, undergoing a revamp, and services such as Mapquest. All this has to happen while managing the decline of AOL's legacy internet access business, once the driver of the company.

Sifting through for positive signs, Mr. Armstrong said the number of advertisers AOL serves is up significantly over last year and that U.S. premium display ad sales -- the future driver of the company -- only dropped 7%, and just 2% from the first quarter.

"Nobody likes to show up to these calls and show down numbers in an up market," Mr. Armstrong said. "We're competitive people. We are faced with making very significant shifts to this company."

AOL's search deal with Google expires in December and Mr. Armstrong said he and top deputies are in "second-stage" talks with "multiple parties" to power search on AOL properties. He said current talks -- presumably with Google and with Microsoft's Bing -- are focusing on "the revenue we get and the distribution we get for our products and services."

He also said he's making cultural changes at the company to make change happen faster, canceling "summer Fridays" and replacing them with a "summer sprint." "When I jokingly said the AOL elves are back at work, it's about putting the magic back in this company and the magic back in the brand," he said.

During the turnaround, Mr. Armstrong said he is more focused on the company's audience metrics -- how many people AOL reaches with its products and services, key to building future display-ad revenue. AOL reached about 112 million unique users a month in the second quarter, according to ComScore, about flat with the first quarter of 2010.

The biggest new focus in terms of content is video, and output at its newly acquired StudioNow unit increased 25%. "You will see a new home page that is targeted heavily around video this quarter," Mr. Armstrong said.

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