Don’t Move AOL to Your Inbox Just Yet

Diane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For the first time in eight years, AOL (NYSE: AOL) reported overall growth in revenue.  Helping the company behind the iconic “you’ve got mail” message log a profit was a gain from an asset sale.

Net income jumped 57% in Q4 2012, despite lower profits from its core businesses. A 13% increase in ad sales offset a 10% decrease in its internet access subscription revenue. Total revenue rose 3.9% to $599.5 million, beating Wall Street estimates of $574 million.

Shares spiked some 7% following the results, a nod of confidence that CEO Tim Armstrong’s tactics of morphing the one-time strictly internet company into a digital media company powered by ads is actually working.

But before you consider putting AOL in your portfolio, it would be prudent to look deep into the results.

Yes, the devil’s in the details.

Operation income, before depreciation and amortization, slipped 7%.  AOL’s media properties, including the Huffington Post and Patch, slumped 34% in earnings before interest, taxes, depreciation and amortization (EBITDA), although it did kick in a tepid 4% in revenue growth for the quarter.  Meanwhile, global display advertising dipped 0.5%.

The real drag appears to be Patch, the local news network that compromises a large part of AOL’s content business. The segment fell drastically short of AOL’s revenue target for the year. Armstrong boasted some six months ago that Patch’s 900-plus sites would rake in $40-$50 million for all of 2012. The actual tally was $34 million. 

Superstom Sandy was blamed for the shortfall. We’ll see soon enough if the devastating hurricane was the true culprit behind Patch's underperformace and if that can be patched.

Armstrong vows Patch will achieve run-rate profitability by Q4 of 2013, as AOL aggressively moves to woo regional advertisers, which is a shift from the local and national advertisers it has been vying for. Also planned are new partnerships with metro newspapers and television stations, both of which have slashed suburb coverage in favor of more worldly news. While doting parents believe little Johnny and Suzie’s home run and awards merit front page news, here’s a bulletin—it doesn’t and it won’t hit the presses.

But what has made front page news in a bevy of newspapers and on a bounty of business sites were fourth quarter earnings from Yahoo! (NASDAQ: YHOO). The company reported only a modest revenue increase of 4% year over year to $1.22 billion. But Yahoo!'s future has many yelling "yippee!"

There have been high hopes for Yahoo! since Marissa Mayer took over as CEO last July. Mayer’s impressive background and stint at Google goosed shares after she took the helm. Mayer acknowledges that elevating Yahoo! to its once lofty stature and profitability is a long journey, but she says she is committed to and up for the task. Mayer’s plans for turning the company around includes overhauling a dozen of its online services to increase the amount of time users spend on its websites. The results are expected to be a “chain reaction of growth.”

Whisphers have swirled that Mayer may make Yahoo social after she commented that "One of the things that people really want to do is share their interests with friends." A hook-up with Facebook is possible.

Mayer's strategy appears ambitious, yet totally possible. With 700 million active users every month, Yahoo! continues to be one of the most visited sites on the Web.

Another site making its presence known is the professional networking site LinkedIn (NYSE: LNKD). The site aims to help individuals further their careers or simply share their views with like-minded people. The company went public in 2011 at $45 a share. The stock has been on a tear since then, and now trades upwards of $150. Fourth quarter 2012 results marked the seventh consecutive quarter that LinkedIn handily beat on both earnings and revenue. Even better, guidance for the full year ahead is bullish.

LinkedIn has been growing not simply thanks to a growing member base, but thanks to a growing "paying" member base, which includes Fortune 500 companies with deep pockets. These entities are ready and eager to spend money to find top-notch and competitive talent.

While AOL's results look promising and may have sent some bears into hibernation, the company has a lot more to prove before a bullish stance is cemented.

For now, its looks sensible to filter AOL into the Spam folder.



DianeAlter has no position in any stocks mentioned. The Motley Fool recommends LinkedIn. The Motley Fool owns shares of LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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