It seemed like a long-shot plan at the time but it might, just might, be working after all. The years-old restructuring project that is AOL (NYSE: AOL) finally seems to be producing results, and in the firm’s most recent quarterly financials are pretty good. The company was not only profitable but topped analyst estimates, even when a big one-time gain is factored out. From where I’m sitting, this is a company that might be on the road to a comeback.
Back in black
Total revenue for AOL amounted to US$531 million while net was nearly double that at US$971 million. Uh, what? Well, nearly all of the profit — US$946 million, to be exact — was because of a one-time sale of patents to IT powerhouse Microsoft (Nasdaq: MSFT).
Taking the Microsoft deal out of the equation still leaves a net profit to the tune of around US$25 million. That isn’t half-bad for AOL, given that many of its quarters since being spun off from Time Warner (NYSE: TWX) in 2009 have been dipped in red. In terms of the top line, analysts expected it to hit around US$519 million, so a beat by US$12 million is a heartening development. As is that net profit figure, which in the second quarter last year was a loss of US$11.8 million.
Always a media maven
Re-tuning a business is hard, expensive work, particularly for a firm that was once so dominant. Many of us crusty old-timers remember the Internet Wild West of the 1990s, when “broadband” was a distant dream and dial-up access the agonising standard. In those frontier days, AOL was the Internet service provider much of America dialed in to.
Those salad days were never going to last, of course. Inevitably the telecom, cable, and satellite providers, with their wide pipes, took over the ISP market. Before that occurred, however, an AOL fattened by a rich share price bought Time Warner. That was the high-water mark of the Age of the Dot-Com. The stock prices of many big Internet names of the time justifiably collapsed after that. The two partners in AOL Time Warner, never a good and comfortable alliance, limped along in the combined entity before finally parting ways in 2009.
In retrospect, leaving the shareholder value-destroying misadventure of that firm aside, AOL’s venture into media was a prescient move. The company was going to lose its grip of the ISP market sooner rather than later, so a shift into content was a practical survival strategy.
Applying the brakes
Sceptics of the shift remain numerous, not least because AOL’s revenue has been caving since its glory days. Looking at only the past few years, the top line has dropped sharply. While still the leading half of AOL Time Warner, the firm took in US$2.2 billion in 2007. That fell to US$2.1 billion the following year then started to snowball; the annual decline in the metric amounted to US$147 million from 2007 to 2008, then US$347 million in the ensuing one-year period, then a scary US$453 million.
So these recent results should help erase some of the scepticism. Fiscal 2011, while not a banner year for the company, at least saw a reversal of the top line free fall (revenue totaled US$1.3 billion, a slight gain over 2010’s number but a gain nonetheless). On a quarterly basis the road is still rocky; top line was barely more than in the previous quarter and US$10 million-plus below that of Q2 2011. But the worst seems to be over.
Share the windfall
AOL’s latest results are encouraging, and that one-time gain looks very, very pretty. It’s particularly attractive to shareholders now that the firm’s promised to return the proceeds to them. That US$946 million equates to around US$10.07 per share, or roughly 32% of the current stock price. No wonder the market’s driven the shares to their highest level since the 2009 break from Time Warner.
It’s also encouraging that AOL’s dream to turn into a media butterfly is coming along. Media depends on advertising, of course, so it’s good that ad revenues for the firm grew 6% year-on-year during the quarter (to US$338 million).
This is, however, a big market — to the tune of tens of billions of dollars per year — and it’s contested by heavyweights like Google (Nasdaq: GOOG), which drew US$10.5 billion in advertising in the second quarter. Even Microsoft, not exactly known for its success in the online space, brought in US$639 million worth of advertising in its most recent quarter.
So AOL has its work cut out for it. Can it succeed? It’s got a good portfolio (TechCrunch, The Huffington Post) and an appealing ad platform in the state-of-the-art Project Devil service. It might never reach the level of a Google, say, and it almost certainly won’t scale the lofty heights it once enjoyed as a premium online brand. But it’s been doing better than people have expected it to, and it probably has a few more upside surprises tucked in its sleeve.
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A version of this article, written by Eric Volkman, originally appeared on fool.com