AOL revenues fell dramatically in the second quarter, losing advertising revenue and subscriptions in equal measure, down around 26% to just $584 million, as a result its operating income also spiraled out of control and it took some huge hits on businesses it sold off.
The biggest headlines this morning will be the $1.4 billion impairment charge, on crystallized losses on businesses sold, but that fall in operating income, even adjusting for amortization and depreciation, still worries us just as much. AOL appears to be in free-fall.
While this appears calamitous, the business is still generating spare cash. It had $129 million on the quarter of free cash flow, but even this was 44% down from this time last year and the whole thing netted out at a $1 billion net loss.
While AOL executives continued to focus on the few positives in the equation, most analysts will see only negatives this morning and it could be that one of the major US internet brands of the 90s is destined to be acquired going forwards, and submerged into another brand, perhaps Microsoft’s. Two years ago AOL divested itself of most of its overseas ISP operations, which began the shrinking process, now it looks like it has been disposing of US assets which have failed to perform.
It has sold what it considers non-core assets, selling ICQ, DMS, Bebo and its holdings in Kayak, since the Spring. The company said that Bebo generated a $302.7 million deferred tax asset, which is code for made a huge loss. It paid $850 million for Bebo and is understood to have sold it to private equity group Criterion Capital Partners for around $10 million.
In April it sold ICQ to Russian investor DST for $187.5 million and then the Texas-based online research firm DMS Insights to uSamp for financial terms which were so small there was no need to disclose them. It also sold Buy.at to the group which runs rival Affiliate Window, again for an undisclosed amount.
The positives that AOL wants us to focus on are that it reorganized its content business into a variety of “super networks,” re-launched MapQuest, expanded its local social network, Patch (as in what’s going on, in your Patch) into 83 towns from 44 towns and migrated the majority of AOL mail users to an improved back-end system.
AOL talks about much of the advertising loss being down to shifting its base from third party sites, about $49 million of a $110 million shortfall. This is down to those European shutdowns that we mentioned. If this was to have a beneficial effect, of there being more direct business it would (eventually) show as an upside in AOLs overall margin, because it gets to keep more ad money. But it’s certainly not there yet.
But everywhere among AOL figures there was damage. Display advertising was down 13%, and down internationally by 52%; Search advertising was off 28% to $105.8 million, and advertising on AOL properties was down 21% to $226.2 million. We know that AOL is part way through a transition from subscription revenue to advertising, so it was no surprise that subs revenue was off 27%, but it remains $260 million of its revenues, and it will continue to evaporate, albeit at a slightly slower rate, given recent churn figures.
AOL was quick to point out that many of these numbers are down compared to last year, but up sequentially, suggesting that its fight back is under way
AOL says it has $391.6 million of cash plus the $187.5 million from the July 8th sale of ICQ and provided $152.7 million in the quarter from operations with Free Cash Flow at $129.1 million.
AOL explains the entire thing away as revenues losses from the sale of its non-core businesses and from closures and less queries in Germany and France, which were finally sold off during the quarter. The UK had some effect, due to restructuring there. The other influence is that there are less ISP captive subscribers to create advertising inventory ‘ for the most part AOL seems to be saying, this will not repeat. We think it can’t help but repeat.
In the US AOL says that display advertising is flat because inventory is flat. The one star on the horizon is that it cost AOL less money to attract each page of web traffic, with lower Traffic Acquisition Costs.
But however you cut it up AOL got less traffic in the US in its core business. There are various takes on how big its domestic unique visitor traffic is, from 112 million a month down to 103 million and on AOL Media from 82 million to 74 million, depending on which source you use ‘ Media Metrix or a panel system, but they are all downward trending, albeit in single digit reductions. That is except one, AOL says that monthly unique visitors to its AOL Advertising Network rose 5% to 184 million. But this of course continues to use its Third Party web sites which AOL seems hell bent on eliminating.
The net result is that the company cannot have too many more quarters like this one, and if it has another, the management team may find investors calling for their heads or a Microsoft bailout, as has already been rumored during June.