AOL's Ad Business Returns to Growth and Losses Narrow at Media Brands

Declining Internet Access Business Provides All of AOL's Operating Income

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AOL turned in a solid first quarter with advertising revenue up across all segments, the first time that's happened in five years.

0204 p15 Tim Armstrong AOL CEO
0204 p15 Tim Armstrong AOL CEO Credit: Davod Paul Morris/Bloomberg

The company's media business, however, is still losing money, and the company is still milking its declining dial-up business to invest in its content brands like The Huffington Post, Patch and TechCrunch.

Advertising, overall, was a bright spot. Global display, including AOL's brand advertising business, was up 8% to just over $140 million. Global search was up 9% to $98 million. AOL's network business, which includes automated ad trading and placing ads on third-party sites, grew 10% to nearly $121 million in the quarter.

While that's good, AOL is facing competition from new-ish shiny objects competing for display dollars like Facebook and Twitter. The digital ad market overall grew 15% in 2012, according to the Interactive Advertising Bureau.

Total revenue came in at $538 million, up 2%; earnings per share missed estimates, however and the stock dropped nearly 10% in morning trading.

"We are investing in the future of the company," CEO Tim Armstrong said in a conference call. "We firmly believe the next phase of the internet is being differentiated by brands and content flowing across all screens, networks and devices."

A return to growth is great news for AOL, but that its media businesses are still operating at a loss is troubling. Mr. Armstrong said the average local news site on Patch is 22 months old and he expects that group -- which has been losing money for years -- to become profitable in Q4.

AOL's internet access business has been in managed decline for more than a decade. The strategy is to use that cash flow to build the media businesses, but at some point they'll have to stand on their own.

On that front, AOL is pointed in the right direction. Losses narrowed substantially among the media brands, but operating income is still coming entirely from AOL's "Membership Group" which collects access fees from users that still pay AOL to access the internet.

Mr. Armstrong views AOL's ad business as a barbell: with brand advertising and marketing services at one end and automated buying and selling -- sometimes called programmatic -- at the other. Ultimately, Mr. Armstrong believes 50% of the market goes to the automated side, but going forward AOL's differentiator will be its content brands.

"If you are a CPG company or a car company, the differentiation between brands is getting more important," he said. "You have to be excellent at programmatic and excellent at marketing services. If you get caught in the middle you will not have great results."

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