Groundhog Day was a couple of months ago but Tim Armstrong gets his own version of it today, when he chairs the new AOL’s first annual shareholders meeting just one day after the company released negative results for its first full earnings quarter as an indie. Once again, AOL (NYSE: AOL) took significant steps to changes its future and once again, the results disappointed. It’s a script Armstrong’s been trying to rewrite for a year, first within Time Warner (NYSE: TWX) and since December, as the chairman, CEO and shareholder of a public company. In the process, he’s slashed the staff by a third, started to sell non-core assets like the $137 million deal for ICQ announced before earnings, and dismantled much of the structure he inherited while overhauling the sales force.
On the phone with paidContent after his conference call with analysts, Armstrong described two different kinds of AOL investors: those looking for short-term wins and those who are “significantly set up around long-term outcomes of betting on content and the future of monetization on the internet.”
The first would be unhappy with an earnings report that sent the stock down nearly 14.5 percent to $23.96 (its high so far was $29.45 on Apr. 21) and offered little immediate hope of major change. AOL wound up topping the NYSE biggest percentage decliner list. But Armstrong, who said he didn’t know what the stock was doing when we talked, is focusing on the “significant” investors he knows who aren’t likely to be thrilled with the earnings report but “are happy with the changes we made during Q1 and expect us to continue making those decisions as we move forward.” He added, “If we have a choice between long-term investors or fast money, we’re going to take long-term investors every day of the week and twice on Sundays.”
Then again, AOL doesn’t have much of a choice in some areas. No matter what Armstrong and his team do, the company is bleeding high-margin dollars as its subscription and search businesses decline. Search was down 27 percent in Q1, attributed to a 26 percent drop in paid access subscribers who tend to rely more on AOL for search. Says Armstrong, “Even in relation to search, that’s not new information. We’ve been very public about that. The area that is different for us right now is our real clear focus on what we believe is where the puck is going online.” Expect AOL “to optimize the businesses that are in a sort of steady state of decline — access and search — and for us to try to fuel the growth behind the significant changes and disruptive nature that’s happening across the media landscape.” That includes an emphasis on creating massive amounts of content optimized for search through efforts like Seed.com and selling advertising against it.
Armstrong politely disagreed at first when I compared the problem AOL faces replacing high-margin subscriber revenue to the situation newspapers are in as they try to replace print advertising and subscriptions with online income. “If I stripped our brand name off the company and I told you we had 250 million global users, 100 million users in the U.S., and I showed you a portfolio of our products and services and you compare that to a traditional media company, you probably would not be confused between the two business. Although we have a revenue line that’s declining, we also happen to be in one of the fastest-growing areas of the marketplace, probably the entire economy.”
But viewed as businesses trying to replace disappearing major revenue streams, Armstrong said: “It depends what the long-term ad business looks like and what the margins are there but your assumption is a totally valid assumption based on where we are as a business. We’ve been public about the fact that we expect the super ultra-high margin business to go down over time and be replace a high-margin ad business. I don’t have have any future-looking statements on whether those margins are going to be different or the same.”
On the earnings call, Armstrong talked about finally being able to go on the offensive. I thought he already was and asked about that. “We have been actually. But when you take a third of the employees out of the company and reduce the costs as much as we did, you can’t be totally on the offensive.” He calls this the “second phase” of the turnaround, which is about “pointing all our energies and focus in a move-forward direction.”
Armstrong knows a lot of people have what I call “AOL fatigue” and he describes as “a tremendous set of memories people have around AOL and what’s happened in the past.” His take: “I look at the changes that we’ve made and what’s happened at AOL and the culture. I think we have a clear cut strategy. We’re investing in it. We’ve made very tough decisions about focusing on consumers and not over-monetizing the properties and some of those other areas. People have a hangover from the past. We can only help them by giving some aspects for the future.”