Blog Post

AOL Misses Estimates, Finds Continued Weakness On Display Revenues

Given Yahoo’s 20 percent jump in display revenues in Q1, expectations for AOL (NYSE: AOL) have been a little higher since its first solo earnings report in February, when it easily exceeded analysts’ forecasts. This time out, AOL failed to beat the analysts’ consensus of an adjusted profit of $0.69 EPS on $679 million in revenue. In actuality, AOL’s ad revs fell to $664.3 million with net income of $34.7 million ($0.32 EPS).

Looking specifically at AOL’s display revenues, that segment dropped 13 percent, mostly due to weakness on the international side and amid a wider reworking of its sales within Advertising.com under its Ad Desk self-serve platform.

The declines in display were not that unexpected. As Barclays analyst Doug Anmuth pointed out in a research note this week, the “significant disruptions” around AOL’s large sales force re-org at the end of this year into January threw efforts off. The difficulty on the international side of display sales, which were down 29 percent vs. 10 percent domestically, came as AOL winds down its operations in France and Germany.

AOL further explained the display decreases as a reflection of lower volume across its own site network as it tries to reduce the number of ads on its home page to prevent a decrease in traffic while it works to build up its content offerings. The company also said it received $4 million less in revenue from “legacy advertising deals in certain commerce and content areas” that have been de-emphasized, though the release doesn’t provide specifics. As of Q4, AOL had already been backing away from what it calls “low margin domestic search engine campaign management and lead generation affiliate products” as it reworks its own ad efforts.

One of the other areas that is surely impacting AOL’s ad sales are its subscribers — and yes, even with a 26 percent decline, AOL still has about 4.6 million. Monthly average churn in Q1 was 3 percent, a slight improvement over last year’s 3.7 percent. Those subscribers have always been key to AOL’s display sales, since they immediately were exposed to its ads upon signing in. Now that AOL has dismantled its subscriber acquisition campaigns, the fall off could continue to hurt AOL as it tries to change its model.

Apart from the advertising changes, AOL has been aggressive in its cost cutting as operating expenses fell $139 million in Q1, mostly through staff reductions. Just before AOL released its Q1 earnings figures, it had announced the sale of international instant messaging service ICQ to Russian investment group DST for $187.5 million, less than the $287 million base price that AOL bought ICQ for in 1998 and lower than the $200- to $250 million the company had reportedly been seeking. Before that, AOL sold off its buy.at unit for $16.4 million and it promises to either sell or shut down the struggling Bebo social net some time this year.