AOL's big Adap.tv buy ignites sales, but it whiffs on profit

The online media company can thank its takeover of Adap.tv and video ads for an acceleration in revenue, but it barely eked out a profit because of cutbacks at local news site Patch.

AOL CEO Tim Armstrong speaks at a 2010 conference in New York City. Getty Images

If you ask AOL, the third quarter was all about revenue, revenue, revenue -- never mind that big miss on profit.

In the latest three-month period, the online media company grew advertising dollars at double the rate it did the quarter before, thanks largely to its takeover of Adap.tv and video ad growth. But its slim profit -- just 2 cents per share versus the 35 cents analysts were expecting -- was a glaring eyesore on the bottom line.

The miss was largely due to restructuring costs and a goodwill impairment, which is when a company reevaluates how much some of its assets are worth and has to swallow the decreased value of those assets if they've deteriorated.

In this case, the asset was Patch.com, the troubled news site that AOL has been scaling back in the latest quarter.

AOL didn't provide a per-share profit number excluding those effects, but it said that its adjusted operating income rose 19 percent. The company was scheduled to hold a conference call to discuss the results at 5 a.m. PT.

AOL said Tuesday that advertising revenue in the third quarter rose 14 percent to $386 million from a year earlier, doubling the rate of increase from the previous quarter.

Where did the ad growth come from? It wasn't AOL's traditional sources. Search revenue was up 3 percent year over year, and global display revenue was up 5 percent on AOL sites. Those are slower rates than the previous period.

But AOL said third-party network revenue was up 32 percent, "driven by growth in the sale of premium formats, primarily video, across our programmatic platform."

Read: Thanks, Adap.tv.

AOL closed its deal to buy Adap.tv, a video-ad marketplace platform, for $405 million in cash and common stock . It was the biggest deal since Tim Armstrong took the helm of AOL as the CEO from his post as Google's advertising sales guru in 2009. The deal eclipsed the $315 million spent on The Huffington Post in 2011 .

The move underlined Armstrong's priorities in video ads and in so-called programmatic ad models. Adap.tv is a programmatic video advertising firm, which means it uses software to automatically match ad buyers and sellers.

But even without Adap.tv's results, AOL's growth in third-party network revenue led the revenue gains with a 17 percent climb.

Overall, AOL reported a profit of $2 million, or 2 cents a share, down from $20.8 million, or 22 cents a share, a year earlier. Revenue increased 6 percent to $561.3 million.

Analysts on Wall Street expected per-share earnings of 35 cents on revenue of $549 million, on average.

AOL still faces intense competition for ad dollars from traditional media companies and from Google and Facebook, which are growing their ad businesses faster. AOL's advertising revenue growth of 14 percent in the third quarter looks measly in the face of Facebook's 66 percent.

But AOL topped Google as the property with the most video ads watched in September, recording 3.7 billion views compared to the YouTube parent's 3.2 billion in ComScore's Web video rankings for that month. In fact, those 3.7 billion ads were the largest number by a single property ever recorded by ComScore.

Google sites remained, by far, the top online video properties by unique viewers.

The higher restructuring costs in the latest period likely are related to substantial cuts at Patch.com during the latest period, including layoffs. Among those let go was former Creative Director Abel Lenz, whom Armstrong fired in the spur of the moment in front of the Patch team when Lenz reportedly ignored his boss' instructions against recording the confidential meeting. Armstrong later apologized.

Last quarter, Armstrong said AOL would remove costs from the operation and potentially cancel some of the hundreds of Patch local-news sites.

 

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