Time Warner’s (TWX) AOL: Mass Layoffs All But Confirmed


Here is our current understanding of the situation at Time Warner’s AOL, which is based on additional research we’ve done in the past few days. None of this has been officially confirmed by the company:

Major layoffs are indeed coming in October. We believe group heads have been told to cut “30%” of costs.  The “20%-25% of headcount” reductions we reported two weeks ago still seem a reasonable estimate and equate to about 2,000-2,500 people.  We had previously not been able to get confirmation of this.  We now consider it largely confirmed.  A lot more after jump…

–AOL’s subscription business still accounts for more than 50% of AOL’s profit. AOL has done a superb job of scaling access costs down as the subscribers have peeled away, so the business has remained considerably more profitable than we previously thought.  We now believe the subscription business has about a 50% operating margin and accounts for 75% or more of AOL’s EBITDA (vs. the 50% estimate we used earlier this week).  This is a negative for two reasons: 1) the subscription business is dying, and 2)…

–AOL’s advertising business is far less profitable than we thought. We now estimate that the advertising business has less than a 20% operating margin (perhaps as low as 10%), far lower than Yahoo and Google.  This suggests that AOL’s ad business is generating less than $100 million of EBITDA per quarter ($400 million a year) vs. the $240 million ($1 billion) we estimated a few days ago.  A spreadsheet laying out this analysis is here.  Please see this post for the key assumptions.

–Based on the new EBITDA estimate, we now estimate that AOL’s advertising business (media and portal) is worth about $10-$15 billion (vs. the $20 billion we estimated a few days ago).  This estimate is based on a 20X-25x EBITDA multiple and assumes a modest boost in EBITDA once the cost cuts flow through.

–The low margins in the advertising business are the primary reason AOL is cutting costs. The timing of the firings is designed to reset the company’s cost structure for Q1 (and rescue profits).  The cuts are being made in October so management won’t be accused of ordering “holiday layoffs.”

–Q3 and Q4 are going to be ugly.  We are now more confident of this.

–Morale in Dulles is poor.  AOL employees have little confidence in Ron Grant (COO), Randy Falco (President), or Time Warner.  Grant is perceived as a decent Corp Dev/Strategy guy with poor operating or people skills.  Falco is perceived as knowing little about the Internet.  Both are perceived as regarding every decision made by AOL before they arrived as dumb.

–Last quarter’s revenue miss was the result of a change in the search interface and weak display revenue. Ron Grant is perceived to have been responsible for the former mistake.  Mike Kelly (now history) was blamed for the latter.

–Despite its new focus on “networks,” AOL has no coherent strategy for its own media properties.  Competition is intense, and AOL’s properties are broad, so this is a recipe for failure.

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