AOL Q3 Beats Estimates On Sales Of $561M But Net Income Weighed Down By $25M Patch Restructuring

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AOL (owner of TechCrunch) today reported its Q3 earnings with a 6% rise in revenues over a year ago to $561 million, led by growth in its advertising business, specifically around the premium ad formats like video that AOL is pushing as a counterbalance to the dominance that Google has in other formats like search. Those sales figures easily beat Wall Street estimates of $549 million. But a cloud continues to hang over the company’s net income in the form of Patch, the hyperlocal content and advertising effort that has yet to convert into a money spinner for AOL; as well as bigger restructuring costs.

Today, the company noted that net income of $2 million, as well as operating income, net income and diluted EPS ($0.02) “were negatively impacted by pre-tax restructuring costs of $19 million as well as $25 million related to non-cash asset impairments in our Patch operations.”

It will be worth seeing on the call later today whether CEO Tim Armstrong notes any more about the fate of Patch, which this year has seen a hundreds of layoffs and other cost-cutting measures. Despite the fact that Patch has not lived up to expectations for building up a hyperlocal business, AOL — and Armstrong — have hung on to the asset, even as it has drastically reduced its operations, with some 40% of staff laid off, and some 400 individual Patch sites affected either by consolidating with others or shutting down completely.

Here’s a breakdown of how AOL is performing by different divisions:

AOL’s subscription and dial-up business, known as its Membership Group, is still the company’s largest cash cow, reporting some $204.5 million in revenues (down 7% of last year). Perhaps more importantly, as the company’s most mature (and therefore most autopilot) business, Membership continues to carry the can for the company’s profit. The Membership division reported OIBDA of $149.8 million, down 4% over last year but more than offsetting losses in other divisions, spefically AOL Networks and the corporate/other category.

The Brand Group — which includes sites like TC as well as Engadget, Huffington Post and AOL.com — comes in at a close second to Membership in terms of revenues, with $192.5 million for the quarter. That’s up 9% over Q2 2012. It’s OIBDA of $10.9 million is a healthy turnaround from the $9.6 in operating losses in the division a year ago primarily because of Patch losses (now curtailed, as noted above). AOL notes that within the Brand Group display ad revenue was up by 11% and search revenue was up 6%.

AOL Networks, which includes the company’s advertising business on its own properties as well as on third-party sites, comes in as the third-largest division in terms of revenue, at $188.7 million for the quarter. That’s up 19% over a year ago, and was fuelled by 32% growth in its third-party network operation and $17.6 million coming specifically from Adap.tv, acquired for $405 million in August 2013.

Still, AOL Networks is currently at negative OIBDA of $7.1 million for the quarter, compared to a small positive OIBDA of $300,000 a year ago.

Why the decline? Essentially, if Membership is a stable, mature business that requires little investment to run healthily, right now AOL is investing a lot in Networks on a bet that it will ultimately also turn around into being a big sales driver.

Indeed, AOL points out that the decline in OIBDA is due to it doubling-down on building out its ad-tech services, specifically “higher research and product development costs primarily related to continued investment in premium formats as well as Ad Learn Open Platform (our demand-side platform) and AdTech MARKETPLACE (our supply-side platform).”

This is something that AOL has been doing for a few quarters now and it will be interesting to see how it takes shape. Of note, it’s a route being taken by other internet companies like Yahoo, who have found it a challenge to compete against Google on more basic ad search revenues; and it’s also an area that Facebook and Twitter are also circling. In a way, that’s a given: better ways of measuring ad performance and predicting how best to serve ads is something that all ad-based internet properties will do. On the other hand, it points to more competition, not clear sailing, ahead of AOL (and the rest).

[Image: Flickr/Kelly Reeves]