Before AOL (AOL -0.77%) shareholders start popping champagne corks over the company's better-than-expectedr03; earnings report they need to remember one important caveat: earnings "beats" are not so impressive if Wall Street's expectations are pretty low to start. That was the case with AOL.
Net income at the Internet media company was $20.8 million, or 22 cents per share, reversing a year-ago loss of $2.6 million, or 2 cents per share. Revenue was unchanged at $531.7 million. Excluding one-time items, profit was 34 cents per share, beating the average analyst estimate of 29 cent per share, according to Bloomberg News. Analysts expected revenue of $522 million. This was the first quarter in seven years that AOL didn't post a year-over-year decline in sales.
Shares of AOL, which have more than doubled this year, surged more than 10% in early trading to above $39. The stock is trading ahead of the $34.58 average price target of Wall Street analysts.
Under CEO Tim Armstrong, AOL has been transforming itself into an ad-supported media company. The company is still dependent on its dial-up Internet access business, though that seems to lessen by the quarter. Armstrong's strategy to acquire well-known Internet media brands such as The Huffington Post and TechCrunch appears to be paying off. The AOL turnaround, though, remains a work in progress.
For AOL's skeptics, there were a few red flags in the quarter. Domestic display ad revenue fell 3% to $122.5 million even though traffic at AOL's properties, including its hyper-local Patch network, grew during the quarter. Traffic acquisition costs, which are the fees AOL pays its partners, rose more than 17% to $89.6 million.
Patch, which AOL skeptics have long argued is a drag on the company, saw a 19% gain in traffic in September. Global advertising revenue jumped 7%, its sixth consecutive quarter of growth. Search and contextual advertising revenue gained 8%, the first increased in more than three years. Some of these gains are no doubt due to the election. Patch and The Huffington Post, in particular, have been pushing their political coverage over the past few months.
Maintaining the momentum that AOL has acquired this past quarter will be difficult. The question isn't whether AOL's traffic will fall, but -- once the identity of the leader of the free world is determined -- by how much. People lose interest in the news after big events. Figuring out how to keep these readers engaged when the world is more "normal" may be Armstrong's biggest challenge yet.