AOL Q1 Earnings Disappoint, Sells ICQ

Failing to meet Wall Street expectations, AOL on Wednesday said first-quarter earnings fell by 59%, as revenue from both advertising and subscription fees declined year-over-year.

For the period ending March 31, AOL reported net income of $34.7 million, or 32 cents a share, compared to net income of $82.7 million, or 78 cents a share, for the same period the previous year.

Revenue, meanwhile, fell by 23% to $664.3 million. Specifically, advertising revenue fell by 19% to $354.3 million, while subscription revenue dropped by 28% to $282.7 million.

Charges related to the amortization of intangible assets, restructuring and stock-based compensation totaled 47 cents a share for the recent quarter.

In the face of continued challenges, AOL CEO Tim Armstrong remained optimistic. "AOL continues to make progress against our long-term objective of becoming an internet growth company ... Our results highlight the accomplishment of our first goal in AOL's turnaround, which was to significantly reduce AOL's cost structure."

"While our restructuring had an impact on [first quarter] advertising results, we are encouraged by the advertising market's recent strength," Armstrong added. "We are now entering the second phase of AOL's plan, which is to greatly improve the consumer experience, scale the advertising systems and teams, and aggressively pursue our strategy in the marketplace."

In particular, the revenue decline was due to the disruption associated with AOL's domestic sales-force reorganization, international restructuring initiatives and a lower volume of AOL Properties inventory monetized through its network.

This quarter was AOL's first fully independent period following its spinoff from former parent Time Warner late last year.

In a rare showing of support, Credit Suisse analyst John Blackledge said in a research note that AOL's overall results were better than expected. Unfortunately, Blackledge added, display advertising would likely "continue to underperform the market," while search declines would "continue for the next few years."

In the first quarter, AOL said operating expenses declined $139 million year-over-year, which it attributed to relentless layoffs, its exit from several unprofitable international markets and product offerings, as well as cessation of paying a PC manufacturer for distribution on a per-unit shipped basis.

The company continues to streamline business operations, and shed units that it deems secondary to its core mission. Earlier this month, for one, AOL announced plans to either sell or shutter its struggling social network Bebo by the end of the year.

"The strategy we set in May 2009 leverages our core strengths and scale in quality content, premium advertising and consumer applications, positioning us for the next phase of growth of the Internet," read an internal memo circulated among AOL employees earlier this month.

AOL also said on Wednesday that it was entering into a definitive agreement to sell its ICQ instant messaging service to Russian company Digital Sky Technologies for $187.5 million.

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