AOL misses profit estimates; stock tumbles

The AOL logo is posted on a sign

The AOL logo is posted on a sign in front of the AOL Inc. offices on February 7, 2011 in Palo Alto, California. Photo Credit: Getty Images / Justin Sullivan

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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 22 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.

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“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.

Shares of AOL dropped 21 percent to $34.51 at 10:44 a.m. inNew York, where the company is based. They had slid as much as 22 percent earlier in the day, the biggest intraday decline since August 2011.

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.

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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.

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