AOL Turns in Another Rocky Quarter

Portal Reports Ad Revenue Down 27%, but Has a $700 Million War Chest for Deals

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NEW YORK ( -- It's been a rough year for AOL. Coming out of its drawn-out and costly detachment from parent company Time Warner, the portal has consistently booked far less ad revenue than it did in 2009 as it attempts to transition away from dial-up internet business and into a pure-play media company.

AOL has a $700 million acquisition war chest through its AOL Ventures arm.
AOL has a $700 million acquisition war chest through its AOL Ventures arm.
Third-quarter advertising revenue fell 27% to $292.8 million from $402.3 million in the same period last year. Total revenue, meanwhile, declined 26% to $563.5 million from $763.9 million. That beat Wall Street's estimate of $557 million, however, and investors have remained cautiously sanguine, sending AOL's stock price up 22% in the past six months.

CEO Tim Armstrong, who has been on the job for the past 18 months, said, "At a global level we're pleased with results, but there's a lot of work to do."

In his efforts to turn the company around, Mr. Armstrong has been busy both buying and shedding assets, scaling back some businesses while increasing others. The company sold a slew of non-core businesses, including its failed social network Bebo and chat product ICQ earlier this year, but it made a few significant acquisitions this quarter, buying video syndication company 5Min Media, web-software maker Thing Labs and tech blog TechCrunch.

Altogether, the company paid $120.2 million in cash and incentives for the three acquisitions, underscoring Mr. Armstrong's strategy to build AOL into a content and distribution business.

More specifically, Mr. Armstrong said the company is looking to build and buy more profitable content verticals, which includes video; to exploit local opportunities through its crowdsourced news division Patch; and "to lock down AOL's 2011 advertising pipeline," namely via its newest big-sized ad product, Project Devil.

"We are going to be an investment company in those areas," he said. The company has a $700 million acquisition war chest through its AOL Ventures arm and it is no longer limited to $100 million deals as proscribed by a credit facility the company recently divested. But Mr. Armstrong warned observers that one of his fundamental rules of acquisitions is "no Hail Mary passes."

The chief executive spoke at length about a strategy that internally is known as "80-80-80," and refers to the 80% of heads of households are women; the 80% of purchases are done in local areas; and that 80% of "considered purchases" are influenced by someone else. He pointed to this metric as a way to better understand how the company views potential acquisition targets. Mr. Armstrong saw TechCrunch in the "influencer" bucket, for example.

One area the company has suffered significantly is in its legacy dial-up business where consumers pay to access the internet. The business still accounts for almost half of its overall revenues with $244.8 million, or 44% of overall revenues. Subscription revenue was down 26% year over year in the most recent quarter as well as the previous quarter. Mr. Armstrong did not speak to this ever-dwindling sector of AOL's business, which is a foregone conclusion. "We're not a company where you're going to get return each quarter," Mr. Armstrong said, "and we hope investors realize that."

While Mr. Armstrong expects the company to have another rocky quarter looking forward, he expects the company to start seeing revenue increases by the second half of 2011: "I'll personally be very disappointed if I can't get that to happen."

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