AOL posts higher 3Q net income on gains, cost cuts

The Associated Press
Wednesday, November 3, 2010; 1:53 PM

SAN FRANCISCO -- AOL Inc.'s earnings more than doubled in the third quarter thanks to gains on investments it sold, yet revenue declined sharply as online ad sales fell and its dial-up Internet access business continued to falter.

Nonetheless, the company's results seemed to give investors some reassurance that AOL is on the right track in its plans to turn its business around. Shares rose more than 6 percent in afternoon trading.

The troubled Internet company struggled even before its split from Time Warner Inc. late last year. Led by CEO Tim Armstrong, a former Google executive, AOL is trying to boost its online advertising business as subscribers steadily abandon the Internet access business that made it a household name in the 1990s.

But AOL's online ad business continued to flail in the third quarter, even as competitors such as Google and IAC/InterActiveCorp showed growth.

Armstrong said the company is working quickly to revitalize itself, but acknowledged it probably won't see the benefits of its efforts until next year.

AOL said Wednesday that it earned $171.6 million, or $1.60 per share, in the July-September quarter, up from $74 million, or 70 cents per share, a year earlier.

But much of the growth was from cost cuts and gains from the company's sale of its investments in the travel website Kayak and the instant messaging business ICQ.

AOL, which is based in New York, had shown few signs of progress in the first half of the year, though Armstrong said in August that the company has "moved the needle from 'survive' to 'thrive.'"

In a statement Wednesday, Armstrong said the company "continued on the path towards better health" through acquisitions, sales of business units, product improvements and site relaunches.

AOL's revenue dropped 26 percent to $563.5 million from $763.9 million. The latest figure was slightly above Wall Street estimates of $557 million, according to a Thomson Reuters poll.

After excluding certain one-time items, AOL earned 82 cents per share. Analysts polled by Thomson Reuters expected 47 cents per share.

Advertising revenue dropped 27 percent to $293 million. AOL attributed much of the drop to reductions in its European operations, the sale of social network Bebo in the second quarter and overall declines in search and display ad revenue. The company has been trying to shed unprofitable businesses even if they contribute to higher revenue.

Competitors have been faring better. So far this quarter, Google, Yahoo Inc. and IAC/InterActiveCorp all reported growth in online advertising. Research firm eMarketer estimates that overall online advertising spending grew nearly 12 percent in the third quarter from last year, to $6.15 billion.

Armstrong said the company had a choice of how fast to push its turnaround.

"And I think we made a big decision to jump out of bed, put on our sweats and head straight to the gym and the track to start a fairly intense rehab-and-training program internally known as the 'Summer Sprints,'" he said during a conference call with analysts.

He pointed out a number of changes AOL made during the quarter as part of this, including the launch of the company's new advertising system, known as "Project Devil," the relaunch of properties such as AOL Travel and MapQuest and the redesign of the home page, which was then relaunched this week.

Still, he said AOL's fourth quarter will be "bumpy" because of ongoing changes, and he doesn't expect the signs of the turnaround to shine through until next year.

Speaking about online ads in particular, Armstrong said he would be "personally disappointed" if AOL isn't in line with industry growth rates by the second half of 2011.

Revenue from AOL's dial-up Internet business declined 26 percent to $245 million. This business has been dwindling for years due to the rise of faster Internet services.

At the end of the quarter, the dial-up business had 4.1 million subscribers - a drop of 24 percent from last year. At its peak in 2002, AOL had 26.7 million subscribers.

AOL shares rose $1.56, or 6.2 percent, to $26.85 in afternoon trading.


AP Technology Writer Barbara Ortutay in New York contributed to this report.

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