AOL Shares Fall After Missing Profit Estimates

May 8 (Bloomberg) -- Bloomberg's Dominic Chu breaks down first-quarter results for AOL as sales and profits missed on a decline in subscriptions. He speaks on Bloomberg Television's "In The Loop."

AOL Inc. (AOL), the digital publisher that owns the Huffington Post and TechCrunch, fell the most in five months after reporting first-quarter profit that missed estimates.

The shares slid 8.9 percent to $37.74 at the close in New York, the biggest one-day drop since Dec. 3. The stock has gained 27 percent this year, beating the 14 percent rise of the Standard & Poor’s 500 Index.

Profit, excluding some items, was 41 cents a share, missing the 45 cents analysts predicted on average, according to data compiled by Bloomberg. That broke AOL’s streak of six straight quarters of topping profit estimates. The stock drop shows AOL has more work to do to convince investors the company will consistently deliver growth, said Paul Sweeney, senior media analyst for Bloomberg Industries.

“The market clearly has the company on a short leash,” he said.

In AOL’s third-party ad network division, which helps advertisers and publishers buy and sell advertising inventory, sales growth decelerated to 10 percent, said Youssef Squali, a media analyst with Cantor Fitzgerald LP in New York. That compared with 31 percent in the previous three-month period.

“That was part of the issue,” he said.

Revenue Shortfall

First-quarter total sales also fell short, reaching $538.3 million, compared with the $542.1 million analysts estimated on average.

Even so, total advertising gained 8.8 percent from a year earlier to $359.2 million. Display advertising, the banner ads and video commercials streamed on websites that command higher ad rates, increased 7.8 percent to $140.4 million.

AOL Chief Executive Officer Tim Armstrong is still working to transform the once struggling dial-up Internet-services company into an advertising-based publisher. The company has made more investments in Patch, the hyper-local news division that Armstrong said should hit profitability by the end of the year, as well as Huffington Post, which is expanding internationally.

The content division, which includes both sites, narrowed its losses in the quarter to $4.9 million from $16.8 million in adjusted operating income a year earlier.

“We see content as a very good long-term investment,” Armstrong said in an interview after the report. “We’ve made a meaningful amount of progress this quarter, and over a longer period of time investors will realize AOL will be a very large, profitable asset.”

Video Content

Armstrong has also looked to increase the company’s original video content, which garners much higher ad rates than typical banner ads, which have declined. He signed an agreement last month with Nielsen Holdings NV (NLSN), the ratings measurement firm, to try and capture more ad dollars that usually go to television.

The company’s dial-up unit continues to erode, with sales falling 9 percent to $165.8 million in the most recent quarter. Cost of revenue increased, partially as a result of a 21 percent surge in traffic acquisition costs, or the amount of advertising dollars the company passes along to its partners.

In February, the New York-based company also authorized $100 million in stock repurchases over the next year after it spent almost $700 million on buybacks in 2012.

To contact the reporter on this story: Edmund Lee in New York at elee310@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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