AOL profit and revenue nosedive in Q1

The company has sold its ICQ instant messaging service

AOL's profit and revenue plunged in its first quarter, as the newly independent Internet company struggles with its years-long transition into an advertising-supported business model.

Revenue dropped 23 percent year-on-year in the quarter, ended March 31, 2010, from US$864 million to $664.3 million, the company said Wednesday.

Advertising revenue specifically fell 19 percent to $354.3 million, as AOL saw its quarterly sales contract anywhere between 13 percent and 29 percent in the different ad formats it markets, such as display and search, both on AOL-owned and ad network partner sites.

Revenue generated by AOL's dial-up Internet access business, which the company is phasing out, fell 28 percent to $282.7 million.

Net income tumbled 58 percent to $34.7 million, or $0.32 per share, from $82.7 million, or $0.78 per share, in 2009's first quarter.

Rivals Google and Yahoo fared much better during this same quarter.

Yahoo's revenue grew 1 percent to $1.59 billion, after its revenue fell year-on-year all four quarters of 2009, while its profit was strong, with net income of $310 million, or $0.22 per share, up from $118 million, or $0.08 per share.

Google grew its revenue 23 percent to $6.77 billion, while net income also rose to $1.96 billion, or $6.06 per share, compared to $1.42 billion, or $4.49 per share, in the first quarter of 2009.

AOL blamed the revenue drop partly on its corporate restructuring, which includes reducing its global staff by about one third.

"While our restructuring had an impact on Q1 advertising results, we are encouraged by the advertising market's recent strength," Tim Armstrong, AOL's CEO, said in a statement.

The company highlighted its cost reductions, characterizing them as significant and pointing out that operating expenses fell $139 million compared with 2009's first quarter. Most of those cost cuts came from the layoffs, international market exits and the elimination of products.

AOL isn't done cleaning house. On Wednesday, it also announced it has sold its ICQ instant messaging service to Digital Sky Technologies (DST) for $187.5 million. DST is an ISP in Russia and Eastern Europe, where, according to AOL, ICQ is strong. AOL acquired ICQ in 1998.

Earlier this month, AOL announced that it is actively trying to either sell or close Bebo, the fading social network it acquired in March 2008 for US$850 million because AOL isn't willing to invest what would be needed to jumpstart the site.

Bebo is in a very distant sixth place in popularity among social networking sites with 12.8 million unique visitors in February, down 45 percent year-on-year, according to comScore. By contrast, market leader Facebook had 462.7 million unique visitors that month, up 68 percent, according to comScore.

After cutting costs, the company will now focus on improving its users' AOL experience and boost its ad systems and staff, Armstrong said.

Armstrong, who took over as CEO in March of last year, is betting the farm on making AOL a massive producer of online content, trusting that the company will then be able to boost its user traffic and engagement and thus grow its ad revenue.

Key to that strategy is AOL's new, a content management system for writers, photographers and videographers to find freelance assignments from AOL, "hyper local" news provider Patch and event city guide Going. The company has also been aggressively beefing up its editorial staff.

AOL was spun off via an IPO from parent company Time Warner in December of last year.

At midday Wednesday, AO shares were down around 12 percent.

Copyright © 2010 IDG Communications, Inc.

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