AOL (TWX) Mass Firings, Part 3: Bottom Line

In the third instalment of our possible-mass-firings-at-AOL series, we project forward a couple of quarters to see: 1) Why AOL is considering whacking some 2,750 employees (or, if it isn’t, why it wouldn’t be nuts to do so), and 2) what the bottom line for Q3 and Q4 would look like with and without such cuts.

Such an analysis starts with revenue.  As seen in recent quarters (and as shown in this spreadsheet), AOL’s subscription revenue is falling off a cliff.  The rate of decline will likely slow in Q4, as the decision to “go free” anniversaries, but it will likely fall at least 50% year-over-year for the balance of the year.  AOL’s ad revenue, meanwhile, stalled in Q2, and will likely increase only modestly for the rest of the year.  (We’re forecasting a 5% year-over-year increase in Q4, based on the Q3-Q4 sequential growth last year).   Taken together, these forecasts suggest AOL’s revenue will drop 47% in Q3 and 41% in Q4.

So what will happen to EBITDA if AOL doesn’t fire anyone?  With these revenue figures, we estimate that EBITDA will drop at least 20% sequentially, from $485 million in Q2 to about $400 million in Q3 and Q4 ($1.6 billion annualized).  If AOL does, in fact, fire a quarter of its employees, we estimate that EBITDA would drop at least 20% in Q3 (which is almost complete), but then pop right back to Q2 levels in Q4.  This is presumably why AOL is considering firing 2,750 employees.

For details, please see this trending spreadsheet.  It includes our estimates for REVENUE (see above) and COST CUTS (25% of employees, see this post).

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