AOL (s aol) managed to turn in better-than-expected revenue and profit numbers for its third quarter today, but much of the bottom line improvement came from one-time gains due to asset sales as the company restructures. Meanwhile, advertising revenue — which continues to supply much of the web giant’s cash — fell off another small cliff, dropping by 27 percent across all of AOL’s properties. In other words, even as CEO Tim Armstrong tries to turn the ship around, it’s still taking on water in a number of places. The billion-dollar question is: Can the company repair or rebuild itself fast enough to keep from sinking?
Although AOL’s revenue of $563.5 million beat analysts’ estimates for the quarter, it was still down by more than 25 percent over the same period a year earlier. While the company, which was spun off from Time Warner (s twx) a year ago, turned in a profit of $171.6 million for the latest quarter — up from $74 million in the same quarter of the previous year — that number was boosted by the sale of assets such as the ICQ instant messaging service, which was sold to Russian holding company Mail.ru for $187.5 million, and the Kayak travel service, which was sold for $19 million. Excluding those and other one-time factors, AOL’s earnings were flat over last year.
CEO Tim Armstrong has been spending cash freely to expand AOL’s hyper-local Patch.com effort into more communities, and to make content-related acquisitions such as its purchase of TechCrunch, the video-distribution company 5Min and social-media developer Thing Labs (maker of the Twitter client Brizzly) — a group of deals that cost $120 million in total — but the sources of that cash continue to dry up. The company’s subscription revenue, from users of its Internet access service, dropped by 24 percent, and advertising revenue plunged by almost 30 percent. Within the ad business, international display ads fell by more than 50 percent, and search-related advertising dropped by 28 percent.
As Armstrong described in a recent interview with Om, the company is trying to rapidly build a content and advertising business while the bulk of its existing businesses are declining rapidly — a little like trying to build a ship while the one you are sailing is eaten by termites. On the company’s conference call, the AOL CEO talked a lot about building a “distribution network” for content and advertising, with landmark assets such as Patch and TechCrunch being destinations on that network.
Armstrong also said that the company — which has $623 million in cash on hand — plans to continue making acquisitions to build this content-distribution business. AOL investors will have to keep their fingers crossed that the cash holds out until Armstrong is finished building them a new boat.
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