Investors Like What They See at AOL

 | Feb 11, 2014 | 11:30 AM EST
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AOL (AOL) reported fourth quarter fiscal 2013 earnings last week. While I haven't given AOL a second thought in more than a decade, distasteful comments about "distressed babies" by CEO Tim Armstrong had me wondering what the company was up to.

While Armstrong may be gaff prone, he certainly has worked hard to turn the company around and the stock has responded. In the one-year period ending February 10, the shares are up 30%.

In the fourth quarter, AOL delivered its strongest revenue growth in a decade. Total revenue was $679 million, up 13% over last year. Total revenue for the year was up just 6% to $2.319 billion. In the quarter, ad revenue grew 23% mostly driven by higher pricing.

Subscription revenue from AOL's days as a dial-up company weighed down the results. Subscription revenue declined 10% in the forth quarter and 8% for the entire year. AOL still has 2.5 million subscribers, paying just over $18 a month.

AOL has been hacking away aggressively at costs (i.e. employees). Since 2009, expenses are down 55% to just $138 million. While cutting costs, the company has managed to increase revenue and to invest heavily in future growth.

Revenue has risen because the company has been able to generate increased traffic by offering differentiated content. Traffic on all AOL properties increased 6% to 120 million unique users. AOL has also expanded the traffic to its advertising network. Network traffic is up 11% and unique visitors are up to 207 million a day.

Things are not so rosy on the balance sheet. Free cash flow sunk 21% to $192.1 million, which was disappointing. Operating income was a mess too. Operating income fell 84% to $190 million from $1.2 billion. AOL management uses a made-up measure called "Adjusted OIBDA" to filter out the effects of restructuring costs, equity-based compensation and asset impairments. Naturally, adjusted OIBDA rose 16.5% to $480 million. For any sustained turnaround, free cash flow needs to improve.

For fiscal 2014, analysts estimate AOL will earn $2.5 billion in revenue and $2.29 per share. Since December 2009, AOL has reduced its shares outstanding by 25% and has approximately $115 million left on its current share repurchase agreement.

Investors like what they see. The stock began to outperform the S&P 500 two years ago as the company's problems bottomed. After a decade of bad news, I think it will take sometime for big investors to find their way back to the stock. But as long as AOL can find ways to increase traffic, ad revenue and user engagement, the stock will head higher.

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