AOL Declines Most Since Spinoff After 58% Profit Drop and Sale of ICQ Unit

AOL Inc. dropped the most since its December spinoff from Time Warner Inc. in U.S. trading after first-quarter profit fell on a steeper advertising sales drop than analysts expected.

Net income dropped to $34.7 million, or 32 cents a share, from $82.7 million, or 78 cents, a year earlier, New York-based AOL said today in a statement. AOL also agreed to sell ICQ, an instant-messaging unit in Russia, Germany, Czech Republic and Israel, to Digital Sky Technologies for $187.5 million.

Chief Executive Officer Tim Armstrong, who took the job a year ago, is shedding assets he can’t afford to turn around to focus on reversing slumping advertising sales. The Internet company said today it won’t see growth in domestic display ads until at least the first quarter of 2011.

“Given all the initiatives to whittle down the company and really all the changes being implemented, it’s very hard to determine when it will return,” Clay Moran, an analyst at Benchmark Co. in Boca Raton, Florida, said of ad sales growth. “You can’t really notice the cyclical improvement that’s occurring in advertising when you look at AOL’s numbers.”

Moran, who recommends holding the shares, projects ad declines of 17 percent to 18 percent every quarter this year, and said he’s hopeful growth will return next year.

Shares Drop

AOL, which publishes sites such as MapQuest, PoliticsDaily and Lemondrop.com, dropped $4.05, or 14 percent, to $23.96 at 4:01 p.m. in New York Stock Exchange composite trading, the most since the company was separated from Time Warner on Dec. 10. AOL has gained 1.9 percent since the spinoff.

AOL pegged some of the decline in advertising sales on the reorganization of its sales force. Armstrong also decided to exit international markets to lower costs. He’s making the changes to prepare AOL for what he says will be “significant” online advertising growth in the next five years.     “We proactively chose not to take short-term revenue strategies,” Armstrong said on a conference call. “Based on what you see in the industry growth around advertising, I think it would be easy to look at our results and say there’s a major issue around AOL’s strategy around advertising, or something wrong. But I think in essence it’s just the opposite.”

Advertising sales fell 19 percent in the quarter, including a 13 percent drop in display ads and 27 percent slide in search ads.

Display Ads Fall

U.S. display ads fell 10 percent from a year earlier after gaining 1 percent in the fourth quarter. Youssef Squali, an analyst at Jefferies & Co. in New York, estimated a 5 percent drop.

“AOL’s restructuring efforts showed good cost management, but also showed that any top line improvement from the secular recovery won’t emerge at AOL for several more quarters,” Squali said in a note to clients today.

Squali recommends holding the shares, citing “near-term choppiness” as the company’s display ads trail competitors.

Yahoo! Inc.’s display ad sales gained 20 percent in the first quarter, the Sunnyvale, California-based company said April 20.

ICQ’s selling price was at the low end of an estimated $200 million to $300 million, John Blackledge, a New York-based Credit Suisse analyst who rates the stock “underperform,” said in a note to clients.

AOL reiterated today it may sell or close social-networking Web site Bebo, less than two years after buying it for $850 million.

To contact the reporter on this story: Sarah Rabil in New York at srabil@bloomberg.net

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