AOL Q1 Revenue Down as Display Advertising Softens

Domestic display revenue, which accounts for 36 percent of AOL's ad revenue, fell 1 percent to $118.9 million. Search and contextual advertising revenue dropped 6 percent to $89.6 million. Google runs text-based paid search and contextual ads on AOL properties, and AOL said revenue from the relationship hit $84.5 million for the quarter, down 4 percent year over year. The decline in AOL’s search and contextual ad revenue was blamed on a 14 percent falloff in U.S. access subscribers and fewer searches on co-branded portals and internationally.

“I was not happy with the domestic display [numbers] over the course of Q1,” Armstrong said during an earnings call Wednesday morning. He said he expected the business to rebound in the second half with an improved pipeline and a more data- and ROI-centric sales strategy.

AOL is also looking at mobile as an emerging revenue stream. Armstrong said mobile is in a test phase for clients and that making money from mobile would rely on the creativity of the ad formats, pointing to AOL’s click-to-call and Project Devil for mobile ad products as examples of the company’s efforts. He added that AOL was working on a “fairly unique ad network product” that would shore up the inability to cookie mobile devices.

Armstrong also fielded questions about AOL's ongoing proxy fight with shareholder Starboard Ventures. The activist investor group has called on AOL to return to shareholders 100 percent of the proceeds from its $1 billion patent sale with Microsoft and has nominated its own candidates for elections to the company’s board. Armstrong said AOL planned to return 100 percent of the proceeds to shareholders but is working on how to do so in a tax-efficient manner.

As for the proxy fight, “I don’t think we’re seeing any resolution on the horizon,” said Armstrong, adding that AOL planned to add two independent directors to its board in the next six to 12 months. The showdown between AOL and Starboard is set to come to a head at the company’s annual shareholders meeting in June when investors will vote on the makeup of the company’s board.

In other Q1 results, a bright spot for AOL was its global advertising business—representing 62 percent of the company’s total revenue—which saw its fourth straight period of revenue growth, rising 5 percent to $330.1 million.

Armstrong said AOL’s heavily scrutinized Patch business had already “booked 115 percent of revenue recorded in the entirety of 2011” and was expected to hit run-rate profitability by the end of 2013.

Revenue from AOL's third-party network offset the declines experienced by the company's properties. The network, which includes Advertising.com, rose 23 percent to $110.2 million in revenue. CFO Arthur Minson attributed that growth to an increase in the number of publishers and advertisers that work with Advertising.com.

AOL has been focusing less on Internet access and more on its other offerings such as PC support and protection, private Wi-Fi access, password manager and PC insurance, Minson said. With that change in focus, subscription revenue declined by 15 percent to $182.1 million in the quarter and now accounts for 34 percent of the company’s total revenue, down from 39 percent in Q1 2011. 

Revenue categorized as “other” fell 23 percent to $17.2 million and represented 3 percent of the company’s total Q1 revenue. The segment consists of licensing revenues from the AOL-owned Adtech ad serving platform, licensing revenues from Mapquest’s business-to-business offerings, ticket sales for Techcrunch events, production fees for its StudioNow video business and mobile email and IM. Decline in the segment stems from a drop in mobile carrier revenue, which had represented 32 percent of the segment’s total revenue in Q1 2011 but fell to 11 percent in Q1 2012. The company said mobile carriers are shifting from paying on a per-message basis.