When I listened to AOL, Inc. (NYSE:AOL)’s conference call last Wednesday, I was thrown for a loop by the intense efforts company execs made to convince listeners that the seemingly long-suffering Patch network is not on its last leg.
For a second, I even forgot that the call was to discuss the company’s second quarter 2013 earnings! All of the talk about Patch nearly stole the show for me when it came to the glimmer of good news from the company. It also nearly masked a major concern that continues to plague the company.
AOL, Inc. (NYSE:AOL) posted a profit as total revenues increased 2% to about $538 million. That was largely due to advertising revenue increasing 9% to roughly $360 million. Also important were increases in the company’s display and search revenues, which increased 8% and 9%, respectively. Together they totaled $238 million. One piece of good news was that AOL, Inc. (NYSE:AOL) beat analysts’ estimates by coming in with earnings per share of $0.32. That’s a 45% increase over last year’s figure.
Earlier this year I wrote that AOL, Inc. (NYSE:AOL) is a stock that investors shouldn’t give up on. Consider this: its shares are up about almost 30% so far this year, and they have more than quadrupled in the past 21 months, according to Investor’s Business Daily.
Mitigating this good news were declines in the company’s subscription revenues, which fell 9% to $166 million. In fact, the company reported declines of 15% in terms of its domestic AOL, Inc. (NYSE:AOL)-brand access subscribers. And, yes, for those of you reading this with a puzzled look and thinking, “AOL still has subscribers?!” In fact, its dial-up service still accounts for most of its profits. The number of subscribers during the first quarter was roughly 2.6 million, a 15% decrease from the first quarter of 2012.
That being said, AOL has watched rivals such as Yahoo! Inc. (NASDAQ:YHOO) and Microsoft Corporation (NASDAQ:MSFT) also struggle to maintain in the face of the growth of Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB). The main area where it is losing ground deals with display advertising.
In January, I told you about how Google Inc (NASDAQ:GOOG) led the pack last year when it came to display ad revenue share. Well little has changed, as the search engine giant is expected to continue to hold the top spot this year with $3.11 billion in ad revenue, according to eMarketer. Facebook Inc (NASDAQ:FB), which lost the top spot last year, will rake in $2.75 billion in 2013, up from $2.18 billion last year.
As you can see, it is imperative that AOL, Inc. (NYSE:AOL) become innovative in developing ways to keep up with the competition and stop growth declines. To make that happen, it has tried to diversify its business model. It has explored all matters of businesses in an attempt to maintain a presence in the Internet. Many of these are working, including Huffington Post, MapQuest and TechCrunch.
And then there is Patch. Doomed by critics as a failure almost from the first day its first hyper-local site was launched, the business has yet to turn a profit. With CEO Tim Armstrong at the helm, AOL has spent a small fortune on it – to the tune of $100 million. Patch was built on the premise that it would be very well sought-after because it offers community news and happenings tailored for affluent cities and towns throughout the country. That may be the case, but the issue boils down to its convincing businesses to advertise on the sites, which basically serve niche audiences. Business owners know they can use their advertising dollars to reach a broader audience by going through any of AOL’s competitors.
Despite this seemingly huge disadvantage, AOL has pushed forward with Patch. During the conference call, it was reiterated that Patch will be profitable by the fourth quarter of this year.
“On the advertising side, I’d say the same thing I said during the Q4 call, which is, we are under a constraint to really move the company towards profitability by Q4,” Armstrong said. “And that profitability focus is coming with some trade-offs in revenue in other cases where we’re still growing revenue, but we’re really focused on maneuvering the entire brand to profitability.”
Armstrong went on to try to quell concerns that Patch is taking too long to achieve profitability.
“The average Patch has been up for about 26.5 months right now. And as a media property and an investment property, whether you look at magazines, cable channels, or any of those things, it usually takes five to eight years for those things to get to profitability,” Armstrong said. “So [for Patch] you have a very, very fast process at AOL in terms of optimizing the platform, the products, the ad products, the people, and the communities around doing that.”
Armstrong went on (and on and on) about how great Patch is, and how the company was focused on making it profitable. While there are critics of Patch and its effects on AOL’s earnings, there is optimism among market players. Cowen & Co. analyst John Blackledge noted last week that his firm had initiated coverage of AOL with an “outperform” rating. This is partly based on the company possibly increasing its earnings per share next year by as much as $0.51 due to Patch.
There is no better way to respond to AOL’s insistence that Patch makes sense as a business and is worth dumping money into than the classic movie line, “show me the money.”
The article For AOL, Patch Profitability Is Key originally appeared on Fool.com is written by Tedra DeSue.
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