Peter Kafka

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AOL Still Can’t Meet Wall Street’s Low Expectations

Wall Street has low expectations for AOL (NYSE: AOL), but Tim Armstrong and company still couldn’t meet them for Q2. The publisher generated revenue of $584 million last quarter, and analysts were looking for $602 million. Ad revenues, meanwhile, dropped another 27 percent, which is on the low end of street expectations.

AOL’s earnings numbers were sent out of whack by a giant $1.4 billion goodwill charge. Most of that comes from the write-down the company took when it sold off Bebo for a bag of potato chips. But that’s not all of it.

The company’s description: “The underlying drivers of the impairment were a significant increase in net assets due principally to cash provided by continuing operations and a significant deferred tax asset associated with Bebo concurrent with a significant decline in AOL’s stock price since April.”

In any case, if you strip out those charges, AOL recorded the earnings equivalent of $0.66 a share, just under Wall Street’s $0.67 consensus.

But the two important things to watch here are the rate of decline at AOL’s subscription business (which powers the company in the present tense) and the story at AOL’s ad business (which is its putative future). Here’s the breakdown:

That 27 percent subscription revenue drop is steeper than expected. Perhaps people, like my in-laws — who continue to pay AOL a monthly fee even though I beg them not to — are wising up.

The bright spot for the company is its U.S. domestic display sales — that 7 percent decline is better than Wall Street had expected, and AOL says that if you net everything out, sales numbers for its premium inventory are essentially flat, which is the new up!

AOL’s words: “Domestic display advertising revenues reflect flat premium inventory sales compared to the prior year period, despite beginning Q2 2010 with a smaller pipeline, due to incremental revenue generated intra-quarter by AOL sales representatives, offset by the impact on sales of a salesforce reorganization in Q1 2010.”

Here’s Citigroup’s Q2 cheat sheet, via Mark Mahaney:

Armstrong’s opening message to investors during the 8 am earnings call: “Nobody likes to show up to these calls and report down numbers in an up market.” But he restated his mantra: AOL is in the midst of a long turnaround, and eventually, investors will be able to see results.