August 7, 2011 4:05 pm

AOL shares down despite turnround strategy

Investors are punishing AOL shares as the internet access and content company prepares to report second-quarter earnings on Tuesday.

The stock ended last week at an all-time low and Tim Armstrong, chief executive, appears unable to convince the market that his turnround strategy will pay off.

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“There’s still a lot of scepticism out there,” said Rory Maher, an analyst at Hudson Square Research who attended AOL’s recent investor day.

“For a lot of investors and analysts, it’s still a latency story. They need to generate growth and profits and they haven’t done that yet.”

Mr Armstrong, who took leadership of the company in 2009 as it spun off from Time Warner, has attempted multiple strategies to revive AOL’s fortunes in recent months.

In February, he spent $315m, mostly in cash, to acquire the Huffington Post network of blogs.

Months before that, he acquired the Techcrunch blog and a video how-to site. He continues to invest heavily to develop Patch, a series of local news sites.

At the same time, Mr Armstrong has worked to reduce AOL’s headcount and operating costs.

The new properties are meant to build out a network of premium content destinations that AOL can sell display advertising on.

But the competition for online display advertising is fiercely competitive with unlimited real estate on the web and new social media sites taking share.

“It’s a difficult transformation for them,” said John Blackledge, Credit Suisse analyst. “On display, you have Facebook, Google, Twitter and Yahoo all competing.”

Mr Blackledge estimated that AOL’s revenues from display advertising would increase 10 per cent annually over the next five years, growing to nearly $1bn by 2016.

“My expectation is for it to grow but it’s unclear to me if they’re going to be able to grow in line with competition over time,” he said. “The reality is that they’ve lost share for years in display.”

The need for transformation at AOL is acute. Forty per cent of the company’s revenues still come from its dwindling dial-up internet access business.

When the company reported first-quarter earnings in May, revenues from the access business were down 24 per cent to $215.4m from a year earlier.

Advertising revenues also declined 11 per cent last quarter, to $314m, though sales of display advertising ticked up for the first time.

The persistent malaise in this area led to a management shake-up last month, which saw Mr Armstrong replace his top advertising executive.

AOL declined to comment in advance of Tuesday’s earnings.

But AOL, which in 2000 merged with Time Warner at a valuation of $350bn, looks destined to continue shrinking for the foreseeable future.

Mr Blackledge’s model shows AOL generating fewer sales each year through 2016.

“While there are indications that they are moving in the right direction, they haven’t gotten there yet,” said Mr Maher.

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