AOL Profit Falls Short of Estimates on Costs to Lure Viewers

May 07, 2014 5:58 pm ET

(Updates with closing share price in sixth paragraph.)

May 7 (Bloomberg) -- AOL Inc.’s higher spending to attract an audience for advertisers squeezed its profit margin in the first quarter, causing a shortfall against analysts’ estimates. The shares sank 21 percent.

The company reported earnings of 34 cents a share, excluding items such as stock-based pay. That compared with the 45-cent average estimate of analysts compiled by Bloomberg. Traffic acquisition costs -- payments to third parties to share advertising revenue -- rose 54 percent to $150.5 million.

“Investors who are looking at it now probably see us with higher traffic acquisition costs overall, but the reality is that’s part of the company now,” Chief Executive Officer Tim Armstrong said in a phone interview following the earnings report. The company’s acquisition of video-advertising service provider Adap.TV added to those costs, he said.

Armstrong is relying more heavily on the company’s advertising networks for growth, expanding beyond its online- publishing business that produces sites such as the Huffington Post. Costs to attract audiences to AOL sites from search engines pushed down margins in the publishing business, leading to operating income of $1.8 million, compared with analysts’ average estimate of $8.5 million, according to a note today from Cantor Fitzgerald LP.

Third-party ad services now account for almost a third of total sales and increased 55 percent to $186.9 million in the period.

Shares of AOL dropped $9.05 to $34.85 at the close in New York, where the company is based. It was the biggest one-day percent decline since August 2011.

Convertro Purchase

Yesterday, AOL announced it would buy Convertro Inc., which helps marketers evaluate ad purchases, for $101 million, part of AOL’s continuing investment in ad technology.

Even as he delves more heavily into selling advertising on other publishers’ websites, Armstrong said he remains confident that his own content properties, which also include TechCrunch, will help future growth. AOL’s sites would have seen a rise in revenue by about 3 percent or 4 percent without some one-time costs, according to Armstrong, who added that advertising rates had gone up in the quarter.