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AOL ad sales rise, but Patch websites weigh on profit

A woman walks out of AOL offices in New York, November 19, 2009. REUTERS/Shannon Stapleton
A woman walks out of AOL offices in New York, November 19, 2009. REUTERS/Shannon Stapleton

By Jennifer Saba

(Reuters) - AOL Inc reported higher-than-expected third-quarter revenue on increased advertising sales, but earnings fell sharply because of challenges at its network of community news websites known as Patch.

The digital media and entertainment company said on Tuesday it took a pre-tax restructuring charge of $19 million and an impairment charge of $25 million, both related to Patch, sending income down 90 percent to $2 million, or 2 cents per share.

Excluding those items, EPS was 55 cents compared to 22 cents in the year ago period.

Shares of AOL climbed almost 8 percent in early morning trade on Tuesday to $41.76.

Investors welcomed cuts at Patch because they have long eyed it as a problem spot for AOL. Chief Executive Tim Armstrong, who helped start Patch before he went to AOL, made a big bet on the network of local sites dotting communities throughout the United States. Over the years, AOL ploughed more than $150 million in Patch.

But in recent quarters AOL has retreated, making deep cuts in the money-losing operation, and in August it cut the Patch staff by half, to about 500 employees. The company is looking for partners to either operate the network or a buyer who would take control.

Armstrong, who is also listed as AOL's chief operating decision maker, told Reuters, "we're essentially open to the best outcome for Patch ... we are still working through the process there."

AD SALE PROGRESS

Still, the troubles at Patch did not hurt the company's ability to increase advertising revenue, an important metric for AOL as it moves away from dwindling but lucrative subscription dollars for its dial-up Internet service. Ad revenue rose 14 percent to $386 million on higher display, search and network sales.

"The most important (detail) is that their pricing is up four percent and is well above expectation," said Needham & Co analyst Laura Martin about AOL's ability to get more money for ads.

"I think the focus on programmatic and video are exactly the right strategy," she said.

AOL rolled out a splashy initiative to get more advertisers to commit dollars on AOL's electronic exchange that includes video advertising. Video advertising commands higher prices than other forms of digital advertising.

AOL rivals for instance reported declines in the amount of money they can get for an ad: Yahoo's display ad pricing was down 7 percent, while Google said the price that marketers pay when consumers click on their ads decreased 8 percent in the third quarter.

At its Brand Group, which includes the Huffington Post and TechCrunch, display ad revenue increased 11 percent. The group's adjusted operating income was $11 million before depreciation and amortization, compared with a loss of $10 million a year earlier.

Total revenue in the third quarter rose 6 percent to $561.3 million, topping analysts' average forecast of $531.7 million. The rise included the results of Adap.TV, an electronic exchange for video advertising that AOL bought in August.

(This version of the story corrects the last name of analyst in paragraph nine.)

(Reporting by Jennifer Saba in New York and Supantha Mukherjee in Bangalore; Editing by Saumyadeb Chakrabarty, John Wallace and Chris Reese)

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