May 7, 2014 5:40 pm

AOL spooks investors on turnround plans as shares fall 20%

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AOL shares tumbled more than 20 per cent after the internet company missed first-quarter earnings expectations, spooking investors on its long-term turnround plans.

New York-based AOL is in the midst of a years-long transformation from its roots as a subscription-based service for connecting to the internet into an ad-supported digital media company.

To that end, the company has spent billions of dollars snapping up digital media outlets, such as the Huffington Post news and commentary site, producing original web video series and investing in advertising technology. AOL announced its latest deal earlier this week, shelling out $101m for Convertro, an ad measurement firm.

“AOL is a stronger company today than it was last week and last year. I feel good about where we are going,” Tim Armstrong, AOL’s chief executive, told the Financial Times. He noted that AOL has reversed steep declines in revenues and earnings losses and now has reported revenue and profit growth for the fifth consecutive quarter.

However, concerns are rising as to whether that strategy – to produce high quality web content and build a next generation ad-tech business – can overcome fierce competition, industry analysts said.

“They are in turnround mode, and this quarter shows that they are still on that path,” said Tom White, an analyst with Macquarie. (Macquarie said it or one of its affiliates was paid in the past year for providing AOL with non-securities services.)

The results also came as investors have become more cautious about the ad tech industry and less patient for companies investing in future growth rather than delivering solid earnings, analysts said. Shares in ad tech companies Rubicon Project and Rocket Fuel are down about 35 per cent and 10 per cent respectively in the last week.

“AOL has been spared some of the fallout that has happened in the ad tech industry because they were seen as having something unique,” said Ken Sena, an analyst with Evercore Partners. “Not only are they not making anything on that side of the business but they are missing street expectations, too. Why should they be spared?”

AOL’s net income slid 64 per cent in the first quarter to $9.3m, or 11 cents a share, from $25.9m, or 32 cents a share, during the year-earlier period. The company attributed the decline to $22m in restructuring and asset impairment charges. Excluding those items, AOL said its adjusted earnings per share was $0.34.

Total revenues for the quarter increased 8 per cent to $583.3m, with advertising growth offsetting subscription declines.

Analysts polled by Thomson Reuters had predicted earnings of 45 cents a share on revenues of $578m.

“You had a company that was in dire straits four years ago,” Mr Armstrong said. “AOL went from the worst merger in history from turnround to growing. Now we are focused on growth.”

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