AOL Investors Ask: How Much Longer?


Dow LeaderboardAOL (NYSE:AOL) CEO Tim Armstrong has asked investors to be patient as he tries to turn around the struggling Internet media company. In 2012, the former Google (NASDAQ:GOOG) exec will have to show meaningful progress toward that goal because some investors are growing tired of waiting.

Starboard Value LP, which The Wall Street Journal says owns 4.5% of the New York-based company’ stock — is arguing that Armstrong’s strategy to establish a broad lineup of content sites, including The Huffington Post and TechCrunch is a failure. This big investor estimates that these “display assets” are losing $500 million before interest, taxes, depreciation and amortization, the newspaper said. The article noted that Patch, a collection of about 800 local news sites, could lose $150 million this year on a paltry $20 million in revenue.

Interestingly, Starboard doesn’t call for the disposition of underperforming assets or for a sale of AOL. Perhaps, the firm plans to seek representation on AOL’s board (the deadline to nominate directors is Feb. 25). A more likely scenario, though, is that Starboard, which wasn’t available for comment, doesn’t think all hope is lost.

As Armstrong noted during the most recent earnings conference call, AOL had a great third — comparatively so — third quarter. The company posted earnings, excluding one-time items, of 16 cents, six cents better than Wall Street expected. Advertising revenue rose 8%, even though overall sales slumped 6% to $531.7 million. On the earnings conference call, Armstrong spared no superlative.

“With our Q3 results, we now have three quarters in a row of global display growth and two quarters in a row of global advertising revenue growth,” he said. “The trend has clearly improved after our 2010 year of restructuring. Total revenue, which was down 27% a year ago in Q3 is down 6% this year, the lowest rate of decline in five years.”

Still, Wall Street seems to have little faith in Armstrong. It’s easy to see why. AOL has lost about $800 million since it was spun off from Time Warner (NYSE:TWX) in 2009. A slew of high-level executives have departed. Revenue is expected to keep sliding for the next two quarters. The average one-year price target is $17.69, about 16% higher than where AOL recently traded. But short of a buyout or a miracle, that price will be hard to realize. Shares have slumped more than 35% this year.

Armstrong has failed to significantly boost traffic to The portal attracted about 66 million unique visitors in July, making it the Web’s 35th most-visited site, according to data from Google.  Facebook ranked first with 880 million unique visitors, followed by Google’s YouTube with 800 million. Third-place Yahoo (NASDAQ:YHOO) had 590 million, and Microsoft (NASDAQ:MSFT) ’s MSN was fifth with 440 million.

In a recent speech at an industry conference, Armstrong argued that flat traffic is “actually up for us”’ because AOL’s numbers were artificially inflated by bad distribution deals.

AOL’s response to Starboard was also muddled. The company’s statement said, “AOL has a clear strategy and operational plan to provide our consumers and customers with exceptional value, which we believe will lead to the creation of shareholder value.”

Armstrong will have to back up his words with deeds soon, or better, strike a sale to a private equity player. Otherwise, many others will follow Starboard’s missive.

–Jonathan Berr does not own shares of any of the stocks listed here. He’s a former freelance contributor to AOL’s DailyFinance site.

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