Some Bright Spots For AOL, Yes, But Also More Gloom Ahead

AOL (NYSE: AOL) offered some positive signs in its earnings release this morning — total advertising dollars rose for the first time since ’08, display was up double digits overall and in the U.S. But when it warned investors that the surge wasn’t likely to be extended into Q3, that was all investors needed to hear to send the stock plummeting until it recovered some ground later in the day. After a tremendous amount of volatility the last two days, that’s all it took for shaken investors to run for the hills. While there are some positives in AOL’s story, the next few months do not hold out much promise to relieve investors’ worries.

In an interview, CFO Artie Minson told paidContent that AOL saw no ad growth year-over-year in June and that July was looking the same. On top of that, the integration of the Huffington Post into AOL continued through those months, which also contributed to a slowdown.

As a result, although AOL believes it will reach profitability this year, it has pulled back on the forecast. It now expects a profit of roughly $355 million in constrast to something in the range of $425 million earlier. By the end of Tuesday, AOL’s stock price stood at $12, which represented a rise of 7.24 percent after falling nearly 30 percent in the hours before.

AOL has been pinning its revenue gains on driving more premium brand advertising both through its third party network and its owned and operated sites. Typically, when the economy weakens, marketers tend to reduce brand spending and concentrate more on lead generation and direct response, which are naturally cheaper and provider a clearer sense of ROI.

I asked CEO Tim Armstrong what his thoughts on the digital ad market at this point, given all the dark clouds hanging over the economy and the increased volatility in the ad market.

“Digital always has an advantage, even when there’s the chasm between consumer usage that the digital migration of ad dollars,” Armstrong said. “Overall, digital will fare as well if not better than the other ad media sectors. I would hope that the economic issues we’re faced with get cleared up quickly. When the macro-economy is unstable, it does slow marketers’ planning down. But most of our customers are locked and loaded on their 2012 planning, so I hope it keeps up at a strong rate.”

In recent weeks, AOL has reorganized its ad team, jettisoning global ad chief Jeff Levick, a former Google (NSDQ: GOOG) colleague of Armstrong’s, and replaced him with Ned Brody, who had previously been in charge of the network side of the business and is now chief revenue officer.

Was the change at the top a reflection that perhaps things weren’t going so well, despite display rising 14 percent and the Project Devil interactive branding ad formats being largely well-received?

Armstrong was a bit indirect, saying only, “One thing we’ve proven is by changing AOL when we need to, we continue to increase the operational output and strength of the company. You’re only seeing us make changes when we either know or think very strongly that it’s going to have an operational improvement. That was the driver that was very plain and simple on our side. It’s going to allow us to capture more demand in the marketplace.”