Ad Revenue Up, Subs Down for AOL

NEW YORK America Online’s third-quarter revenue was essentially flat at $2.1 billion, as a 3 percent decline in subscription revenue partially offset a 44 percent increase in advertising revenue.

The Time Warner unit’s Q3 adjusted operating income before depreciation and amortization climbed 21 percent to $450 million from the prior-year period. Its Q3 operating income rose 74 percent to $261 million.

The AOL results were released this morning as a part of Time Warner’s second-quarter earnings report.

The Q3 report divulged plans of a restructuring at AOL that will cost an estimated $50 million in the fourth quarter and/or first half of next year. AOL is reportedly preparing to lay off more than 700 workers at its Dulles, Va., headquarters next month.

In the third quarter, AOL’s ad revenue rose by $79 million, thanks in large part to a $30 million increase in domestic paid search and $35 million contributed by newly acquired Advertising.com. AOL closed its $435 million cash acquisition of Baltimore-based Advertising.com in August.

Despite AOL’s Web advertising turnaround, the company still trails its chief competitors in terms of growth. For instance, Yahoo!’s third-quarter revenue from marketing services skyrocketed 212 percent to $765 million; the Web portal attributed the year-over-year growth to boosts in its organic marketing services revenue, as well as incremental revenue from acquisitions, including Overture, the commercial search company it purchased in October 2003.

AOL’s subscription revenue decreased $52 million, as subscribers to its dial-up service migrated to high-speed Internet access or lower-cost, narrowband competitors. As of Sept. 30, AOL had 22.7 million domestic subscribers, down 646,000 for the quarter and 2 million from the year-ago period. The AOL service in Europe had 6.3 million members at the end of June, down 8,000 from Q2 and 33,000 from the same time a year earlier.

Also in the earnings report, Time Warner said that it has established reserves totaling $500 million in connection to ongoing investigations by the Securities and Exchange Commission and Department of Justice, principally involving AOL. The SEC and DOJ have been examining AOL transactions, including advertising arrangements, the methods used to report subscriber numbers and accounting related to its interest in AOL Europe.

AOL has decided to restate its financial results for 2000 and 2001, as a result of an internal probe into the accounting related to the consolidation of, and equity accounting for, its stake in AOL Europe prior to January 2002, when it acquired Bertlesmann’s 80 percent interest in AOL Europe.