AOL: Will Media Laughingstock Have the Last Laugh?
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The Fiscal Times
April 23, 2013

As investors await AOL’s first-quarter earnings report on May 8, let’s think back for a moment on what CEO Time Armstrong and his charges have accomplished recently: Last quarter, for the first time in eight long years, AOL’s (NYSE: AOL) revenues increased over the year before. AOL’s stock, after falling near $10 in 2011, now trades above $37. It has gained 50 percent over the last 12 months, and zoomed 32 percent in the first quarter of this year, surpassing the 10 percent gain by the benchmark Standard & Poor's 500 Index.

What a difference a decade makes.

Business historians will remember that in the early part of the 21st century, was hailed as the shining symbol of the new media when it acquired Time Warner (NYSE: TWX) in 2001 in a deal valued at $350 billion – making it then the largest transaction in history. Before too long, however, the amalgamation was ridiculed as the worst deal in corporate American history, the joined businesses slumping amid the dramatic collapse of the Internet bubble. AOL was castigated by analysts, pundits and stock-pickers as the Pariah of Wall Street.

It didn't help that the combination was also plagued by endless internal strategic squabbles. I covered the blow-by-blow disintegration of AOL Time Warner, and I've never seen such backbiting, as the two merger partners continuously privately disparaged one another for years. Ultimately, and thankfully, the two companies split apart, with Time Warner spinning off AOL in 2009. Even before the spinoff was complete, though, AOL made big headlines when it announced plans to cut its workforce by one-third, chopping 2,500 jobs in an effort to save $300 million a year.

Two years later, AOL was making big headlines again, spending $315 million to buy The Huffington Post. If it wasn’t clear before, it was now: AOL, the company that had been known for its Internet service and “You’ve Got Mail” slogan was a serious player in the media business, even if its profits still came largely from the dwindling dial-up subscriptions.

AOL's growth strategy now centers on content creation, directly pitting it against Marissa Mayer's Yahoo (NASDAQ: YHOO). AOL is counting on The Huffington Post and the AOL On Network, a 14-channel video offering, to serve as catalysts. Google’s YouTube still dominates online video viewership, but AOL is a (distant) second in the number of videos viewed, according to comScore. That’s a promising sign since advertisers will pay more for video spots than traditional display ads. AOL’s overall traffic hasn’t grown much in recent years, but traffic to The Huffington Post has soared since the start of 2011.

To its credit, the "new" AOL has succeeded in keeping its eye on the ball. When the company acquired The Huffington Post, media pundits speculated that there would be a serious power struggle between Armstrong and the strong-willed new queen of blogging, Arianna Huffington. Despite some early reports of culture clashes, the partnership between Armstrong and Huffington has endured, though Huffington’s responsibilities have been slimmed down. “We never said this was going to be an easy ride and that everything went smoothly,” Huffington told Bloomberg BusinessWeek recently.

Still, Armstrong and Huffington are betting on content at a precarious time for many content businesses. The advent of the Internet roiled the mainstream newspaper and magazine industries, forcing scores of them to go belly-up or radically change their publishing plans, wiping out decades of glorious traditions. Each time a newspaper in New Orleans or Denver or Seattle succumbed to the changing times, the industry showed its frailty.

The Internet advertising field is certainly not bullet-proof by any stretch. Online publishers have also watched warily as their arena has been threatened by declining rates for web advertising. Yahoo, when it reported first-quarter earnings last week, disappointed analysts by posting a 7 percent drop in total revenue as its display advertising business weakened.

If AOL can avoid those kinds of disappointments, the investment community will continue to reward it. The stock surge has been fueled by AOL’s $1 billion sale of patents last year, and its use of those proceeds to buy back shares. Some analysts, at least, are optimistic that operating results at AOL can continue to imprive. On March 27, shares of the company jumped the most in more than four months on the wings of a favorable write-up by Barclays media analyst Anthony DiClemente. On that Wednesday, the stock gained 8 percent to close at $39.20, its biggest climb since Nov. 6 (it has since slipped back a bit). Barclays said AOL's profit will increase at a more rapid rate than Wall Street had indicated.

AOL impressed Barclays analyst DiClemente by cutting expenses and exhibiting that 4 percent increase in revenue last quarter, enabling the company to raise profits. DiClemente suggested in a research report last month that AOL can bring on $100 million of annual profit by itself if it closes down its money-losing local-news network, Patch. If it keeps the local division, AOL has promised to have it break even by next year. DiClemente, who is more bullish on AOL’s prospect than some other analysts, said the company’s profit omitting interest, taxes, depreciation and amortization could soar 34 percent this year to $441 million.

After a difficult decade, we’ll find out soon whether Armstrong & Co. can keep surprising the skeptics.