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The Globe and Mail

Amid solid AOL results, trouble spots in digital media strategy

Tim Armstrong, chairman and chief executive officer of AOL Inc., center, laughs during the opening bell ceremony at the New York Stock Exchange in New York, U.S., on Thursday, Dec. 10, 2009.

Daniel Acker/Bloomberg

AOL Inc. reported better-than-expected quarterly results and said it intends to hand over to shareholders 100 per cent of the proceeds from its patent sales to Microsoft.

Earnings blew past Wall Street forecasts, and revenue topped estimates despite lower premium ad sales in the United States.

AOL shares rose 3.6 per cent to $26.52 in morning trading on the New York Stock Exchange on Wednesday after the results.

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Needham & Co analyst Laura Martin described the quarter as "awesome," citing the shareholder return among one of the biggest reasons.

One cloud hung over the results, however. Display advertising – big splashy ads on Web pages that command high prices, an area where AOL is making a huge bet – hit a hurdle in the United States, where revenue fell 1 percent.

"I wasn't surprised that much," Benchmark analyst Clayton Moran said of the display ad revenue. "We saw similar weakness from Facebook and Yahoo.

"It could be an industry thing or that Google is gaining so much (ad revenue) share that other parties are losing."

Late in April, Facebook reported its first quarter-to-quarter revenue drop in at least two years, blaming seasonal advertising trends.

"I was not happy with the domestic display over the course of the first quarter," AOL Chief Executive Tim Armstrong said on a conference call. "A lot of it was a sales strategy off tune."

AOL expects domestic advertising revenue to return to growth in the second half of the year.

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Meanwhile, Pando Daily reported that AOL is seeking a buyer for two of its most high profile sites, TechCrunch and Engadget, citing sources

Mr. Armstrong said it was "100 per cent untrue" in an interview with Reuters.

Since its spinoff from Time Warner in 2009, AOL has been attempting to transform itself into a media destination dependent on advertising revenue, while at the same time winding down its lucrative dial-up service.

The company has snapped up a host of high-profile media properties, like the Huffington Post and TechCrunch, and has poured millions of dollars into a network of neighborhood news sites called Patch.

Patch has been a lightning rod for AOL – the company has spent about $150-million on the effort so far – and investors are eager to see it turn a profit.

AOL executives said on the call that the company expects Patch to be profitable in 2013 and that it should generate $40-million to $50-million in revenue this year.

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First-quarter net income rose to $21-million, or 22 cents per share, from $4.7-million, or 4 cents per share, a year earlier. That was well above analysts' EPS forecast of 7 cents, according to Thomson Reuters I/B/E/S.

Revenue fell 4 per cent to $529.4-million but beat analysts' average estimate of $526.5-million.

In April, AOL agreed to sell the majority of its patents to Microsoft Corp for about $1-billion. Microsoft is selling the patents to Facebook.

AOL executives said on the call that the company intends to pass on 100 per cent of those proceeds to shareholders. When the sale was announced, the company said it expected to turn over "a majority" of the proceeds to investors in a combination of a share buyback and dividend.

The change comes as AOL faces a looming proxy fight with one of its largest shareholders, activist hedge fund Starboard Value. Starboard contends that AOL is not doing enough to return value to shareholders and has nominated three directors to the AOL board. One point that Starboard has been pushing for is a 100 per cent return of the patent proceeds to shareholders.

Mr. Armstrong said on Wednesday that turning over all patent sale proceeds to shareholders likely will not dissuade Starboard from agitating for board seats at AOL's shareholder meeting in June.

"A resolution (of the dispute) would be great. I don't see any resolution on the horizon right now," he said.

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