After warning analysts that its financial results for the latest quarter would be disappointing, AOL (s aol) couldn’t even manage to hit those lowered expectations, thanks in part to a $1.4 billion writedown on assets — primarily Bebo, the European social network that it unloaded earlier this year. AOL’s CEO Tim Armstrong, a former Google (s GOOG) executive who joined the company last year, said that he was “pleased with this quarter’s internal and external trends,” but virtually every single revenue line on the web company’s balance sheet had a minus sign in front of it, including all of the entries related to online advertising, which the company is relying on to provide much of its future growth.
Overall revenue at AOL, which was spun off from parent Time Warner (s TWX) last year, declined by 26 percent compared with the same quarter a year earlier, and that drop was fueled primarily by a steep decline in advertising revenue, which fell by 27 percent year-over-year. The company also saw a 27 percent drop in subscription revenue, as subscribers to its dial-up and online service continued to drop off. AOL has seen double-digit declines in subscribers virtually every quarter for the past several years, and it now has just 4 million subscribers, down from almost 9 million in 2008. Cash flow from that business is one of the things AOL has been relying on to fund its restructuring.
But advertising declines were the biggest thorn in the company’s side: display advertising revenue sank by 13 percent compared with the same quarter a year earlier, search and contextual advertising dropped by 28 percent, and third-party network ads fell by 42 percent. Each of those ad sectors was also down on a quarter-over-quarter basis. Armstrong said that some of the decline came because the company has been restructuring its ad network to try and deliver higher-quality results and focus on premium ads.
On the positive side of the ledger, AOL said that it has almost $400 million in cash on hand, and that operating costs had been reduced in the quarter. But it’s clear that Armstrong has a significant challenge on his hands as the newly public company tries to restructure its way to profitability — something Brad Garlinghouse, AOL’s mobile and Internet chief and a former Yahoo executive, admitted in a presentation earlier this week, when he said the company had “a big f***ing problem.” AOL is also busy trying to fulfill Armstrong’s hopes for its future as a media entity — including building up its Patch.com hyper-local news operation, which the company said had expanded into 83 towns from 44 the previous quarter.