AOL's advertising business is falling apart:

Ad revenue declined 6% year over year. Compare this to Yahoo, Microsoft, and Google, where domestic advertising grew 0-20%. AOL's decline would have been worse if not for its search deal with Google. Display ad sales were far worse, despite growth in pageviews.

Compare this to Yahoo, Microsoft, and Google, where domestic advertising grew 0-20%. AOL's decline would have been worse if not for its search deal with Google. Display ad sales were far worse, despite growth in pageviews. The Platform A network business did not come close to offsetting the collapse of revenue from AOL's own inventory. A few quarters ago, Platform A's network growth was impressive, and, presumably, it grew again this quarter. This means AOL's more-profitable premium business is really sucking wind. Excluding traffic acquisition costs, ad revenue declined a startling 18%.



A few quarters ago, Platform A's network growth was impressive, and, presumably, it grew again this quarter. This means AOL's more-profitable premium business is really sucking wind. Excluding traffic acquisition costs, ad revenue declined a startling 18%. Platform A has lower profit margins: Thus, EBITDA declined more than revenue, despite massive cost cutting.



Thus, EBITDA declined more than revenue, despite massive cost cutting. Pricing of AOL's premium inventory continues to drop: Ad revenue per unique visitor dropped 15% year over year.



AOL's cash flow before capital expenditures was solid under the circumstances, posting a decline of only 7% (the thousands of layoffs helped). Given the decline of the ad business, however, the $1.2 billion in annual EBITDA the company is currently generating will continue to waste away.

The fundamental problem here is that there really isn't an "AOL" anymore: The division is just a collection of quasi-related online assets such as AOL.com, AIM, MapQuest, TMZ, Weblogs, Platform A, and an ISP. If Time Warner can't sell the whole thing as a unit, it should probably begin to dismantle it and sell it piece by piece.

On a positive note, Time Warner's overall performance was solid. Cable, TV Networks, and Films all did well. The company reduced its outlook slightly on higher restructuring charges, but overall the company is performing well given the collapse of the economy. Time Warner will generate $5.5 billion of free cash flow this year, which is exceptionally impressive.

See Also: AOL Key Metrics (SAI Spreadsheet)