AOL Says Turnaround in Sight as Losses Decline and Ad Revenues Grow

Better News in the Third Quarter as Ad Revenues Start Growing Again

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For the first time in many years, the good news outweighed the bad for AOL as it struggles to re-fashion itself as a portfolio of media brands supported by display advertising.

Total revenue, including the portal's declining internet access business, fell 6% to $532 million in the third quarter, but it was the lowest percentage decline in five years, the company said. Overall advertising revenue, on which the company has staked its future, grew to almost $318 million, an 8% increase over the same period last year. The company recorded a loss of 2 cents per share, which beat analyst estimates.

Tim Armstrong
Tim Armstrong

After several years of weakness, AOL is facing some easy comparisons, but the fact that it has arrested decline and is now growing its ad business was welcome news to Wall Street , which sent shares 11% higher in morning trading. "We're heading toward an inflection point of revenue growth, which will then be followed by profit growth," said CEO Tim Armstrong.

The caveat to all this is that AOL's owned-and-operated properties, which AOL sells for premium ad rates to brands, aren't growing much. Unique visitors to the AOL homepage and brands like TechCrunch and Huffington Post, and its 35 million monthly users, grew just 1%, even though both were acquired in the past year.

Mr. Armstrong said that the additions of new sites were offset by declines in traffic to properties such as Mapquest and AIM, as well as the consolidation of AOL brands as a result of the Huffington Post acquisition. U.S. display ad revenue grew 14% over the same period last year, including the new acquisitions. Without them, Mr. Armstrong said display growth was "single digits, apples to apples, year over year."

Global display advertising grew 15% year-over-year. Third-party network revenue grew 28%, with seeing 12% growth. Mr. Armstrong declined to say whether the company was still in talks with Yahoo and Microsoft to pool and sell each other's remnant inventory in a separate exchange.

Revenue from search and contextual advertising fell to $85 million, a 15% year-over-year drop. The company attributed most of the drop to a decline in domestic search queries as a result of the steady decline of domestic AOL access subscribers.

Still, AOL's status in the display world remains uncertain, with the growing influence of competitors Facebook and Google. By the end of 2011, the company is expected to only own 4.2% display market share in the U.S., according to eMarketer. In 2007, AOL held 10.6% share, eMarketer said.

Mr. Armstrong continued to emphasize the company's bet on premium ad formats such as Project Devil ads, future investments in video and mobile, and the growth of the local-news network Patch. He said the number of Devil ad advertisers and campaigns from these advertisers grew more than 50% quarter over quarter.

The company said the Patch network currently includes 862 sites. More than 90% of Patch's revenue has come from what Mr. Armstrong called "local, local" advertisers. He said the company expects to see growth in Patch revenue among regional and national advertisers in the coming quarters.

Future advertising gains are critical to AOL's future, as its dial-up business continues to erode. Subscription revenue continued to plummet in the third quarter, down 22 % to $192 million, and AOL access subscriber numbers declined 15%, which would have been 20% if not for a change in the pricing structure of access products, CFO Artie Minson said.

Mr. Armstrong said that in visiting about 50 advertisers in the last two months, he is confident that there does not seem to be the same pullback among advertisers as in the fourth quarters of 2008 and 2009.

"In digital," he said, "there's a high level of interest and a high level of planning going on."

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