AOL ad revenue dropped a startling 20% in Q1. For the first time, cost cuts did not keep up with revenue declines, so EBITDA also plunged, to $255 million.
The latter–the operating profit–is still impressive considering the wrenching changes AOL has gone through in the past five years, and it’s especially impressive considering the amount of money that Microsoft is still losing in this business. But it’s only about half of what AOL was earning a couple of years ago.
In any event, the ad revenue collapse illustrates why President/COO Randy Falco and Ron Grant got the boot: Because their third-party ad network strategy was a disaster. New boss, Tim Armstrong, arrives at a good time.
In preparation for the AOL spinoff, Time Warner has now segregated AOL on its earnings release. There’s the “Content Group” and “AOL,” which is presumably shorthand for “The Businesses We Want You To Focus On” and “The Business We Wish We’d Never Heard Of.” AOL folks, meanwhile, presumably can’t wait to be free.
AOL revenues decreased 23% ($261 million) to $867 million, due to a 27% decline ($146 million) in Subscription revenues and a 20% decrease ($109 million) in Advertising revenues. The decline in Subscription revenues reflects mainly a continuing decrease in subscribers, related primarily to AOL’s strategy to offer its e-mail and certain other products free of charge. Driving the decrease in Advertising revenues were declines in sales of advertising on third-party Internet sites, as well as display advertising and paid-search advertising on AOL Network sites.
Operating Income before Depreciation and Amortization declined 37% ($150 million) to $255 million, resulting primarily from lower revenues, offset partly by lower traffic acquisition costs ($58 million), lower personnel and overhead costs, as well as reduced marketing, network and other expenses. The current and prior year quarters also included net restructuring charges of $58 million and $9 million, respectively.
Operating Income decreased 47% ($134 million) to $150 million, due primarily to lower Operating Income before Depreciation and Amortization, offset in part by lower depreciation expense ($14 million).
Key Operating Metrics
During the quarter, AOL had 106 million average monthly domestic unique visitors and 58 billion domestic page views, according to comScore Media Metrix, which translates into 181 average monthly domestic page views per unique visitor.
As of March 31, 2009, the AOL service had 6.3 million U.S. access subscribers, a decline of 570,000 from the prior quarter and 2.4 million from the year-ago quarter, reflecting subscriber losses due partially to AOL’s strategy to prioritise its advertising business.
And the rest of Time Warner?
Not horrible. Revenue dropped 4%, thanks mainly to a horrific 23% decline in Publishing. But EBITDA was actually up 3% year over year.
Here are the details:
NETWORKS (Turner Broadcasting & HBO)
Revenues climbed 6% ($149 million) to $2.8 billion, with growth of 9% ($155 million) in Subscription revenues, offset partially by a decline of 2% ($16 million) in Advertising revenues. Subscription revenues benefited primarily from higher rates at both Turner and HBO and the impact of the consolidation of HBO Latin America Group (“HBO LAG”). Advertising revenues decreased, reflecting mainly declines at Turner’s international networks, due in part to the impact of unfavorable foreign exchange rates, and a slight decline at its domestic entertainment networks, reflecting weakened demand.
Operating Income before Depreciation and Amortization grew 11% ($106 million) to $1.1 billion, reflecting mainly increased revenues and lower newsgathering costs, offset partially by higher marketing and programming expenses. Programming expenses increased 2% to $925 million. Programming expenses in the current year and prior year quarters included charges of $5 million and $21 million, respectively, related to decisions not to proceed with certain original programming. Operating Income before Depreciation and Amortization also benefited from the consolidation of HBO LAG.
Operating Income rose 10% ($86 million) to $960 million, resulting primarily from the increase in Operating Income before Depreciation and Amortization, offset partly by increased depreciation ($8 million) and amortization ($12 million) expenses.
Revenues declined 7% ($207 million) to $2.6 billion, reflecting difficult comparisons to the prior year quarter, due primarily to lower DVD sales, driven by fewer home video releases and reduced catalogue sales in the current year quarter, as well as the impact of unfavorable foreign exchange rates and reduced theatrical revenues. The current year quarter included revenues from the theatrical performances of Gran Torino, The Curious Case of Benjamin Button, Yes Man and Watchmen, while revenues in the prior year quarter benefited from the theatrical and home video performance of I Am Legend, as well as the theatrical performances of 10,000 B.C. and The Bucket List. These declines were offset in part by higher television licensing fees, as the prior year quarter was negatively affected by the Writers Guild of America (East and West) strike, as well as higher interactive video game revenues, due mainly to the release of F.E.A.R. 2: Project Origin.
Operating Income before Depreciation and Amortization increased 10% ($28 million) to $308 million, as the impact of lower revenues and higher television production costs, associated with increased network deliveries, were more than offset by lower print and advertising expenses, due primarily to the timing, quantity and mix of titles, as well as reduced restructuring charges ($79 million) and lower overhead costs.
Operating Income increased 17% ($31 million) to $214 million, due mainly to the increase in Operating Income before Depreciation and Amortization.
Revenues decreased 23% ($239 million) to $806 million, due to declines of 30% ($167 million) in Advertising revenues, 16% ($58 million) in Subscription revenues and 18% ($21 million) in Other revenues. The decline in Advertising revenues reflected decreases in print magazine revenues, including the impact of unfavorable foreign exchange rates at IPC, as well as lower custom publishing revenues and declines in online revenues. Subscription revenues decreased, due primarily to the negative impact of foreign exchange rates at IPC and lower magazine newsstand sales, resulting in part from wholesaler disruptions, and lower subscription sales. Other revenues decreased, resulting mainly from declines at Synapse and Southern Living At Home, which is held for sale, offset partly by the impact of the acquisition of QSP, Inc.
Operating Income before Depreciation and Amortization declined 92% ($133 million) to $12 million, due mainly to the decrease in revenues and an $18 million increase in bad debt reserves related to a newsstand wholesaler, as well as higher pension expense, offset in part by lower overhead expenses, including cost savings related to the reorganization in the fourth quarter of 2008. The prior year quarter also included restructuring charges of $10 million.
Operating Loss of $32 million reflected a decline of $125 million compared to the year-ago quarter’s Operating Income of $93 million, resulting primarily from the decline in Operating Income before Depreciation and Amortization.