What will happen to AOL? Parent company of the Patch.com

AOL Inc. is a web services company. Its business includes online content, products and services that they offer consumers, publishers and advertisers. AOL focuses on attracting consumers and providing online advertising services on company owned and operated properties as well as third party websites. Some holdouts still use AOL as a dial-up internet subscription access service even though there are much cheaper, or free, access methods. AOL in addition is the owner of the Patch.com online newspapers.

AOL has seen its stock price plummet over the last year. We were curious why this was happening as AOL has made some large acquisitions recently including the purchase of The Huffington Post for $315 million. The Huffington Post had not been profitable before the merger.

Many financial sites have commented on how AOL is hemorrhaging money. They have lost over $788 million since splitting off from Time Warner in 2009. Bloomberg News reported that a private equity firm may be the only path for AOL to survive due to their loss of value. The Bloomberg article “AOL at 57 Cents on Dollar Gets Last, Best Hope in Private Equity: Real M&A”  states. “AOL’s earnings have “cratered” and investors are losing confidence, said Keith Wirtz, Cincinnati-based chief investment officer at Fifth Third Asset Management, which oversees $16.7 billion.”

AOL’s 10Q report  Cautionary Statement Concerning Forward-Looking Statements says the following:
Further, lower than expected market valuations associated with our cash flows and revenues may result in our inability to realize the value of recorded intangibles and goodwill. In addition, achieving our business and financial objectives, including growth in operations and maintenance of a strong balance sheet and liquidity position, could be adversely affected by the factors discussed or referenced in “Item 1A—Risk Factors” in our Annual Report as well as, among other things:

•           changes in our plans, strategies and intentions;
•           the impact of significant acquisitions, dispositions and other similar transactions;
•           our ability to attract and retain key employees;
•           any cost reductions, restructuring actions or similar efforts, including with respect to  any associated savings, charges or other amounts;
•           market adoption of new products and services;
•           the failure to meet earnings expectations;
•           asset impairments;
•           decreased liquidity in the capital markets;
•           our ability to access the capital markets for debt securities or bank financings; and
•           the impact of “cyber warfare” or terrorist acts and hostilities.

References in this Quarterly Report to “we,” “us,” the “Company,” and “AOL” refer to AOL Inc., a Delaware corporation.

The Cautionary Statement by AOL is a warning to its investors of things that may be problematic. Their financial statements show costs increasing and revenue decreasing. With $338 million in cash, Bloomberg states, the company may be bought for about $500-600 million. The strategy of AOL was to get companies with increasing ad revenue to take the place of their dial up business. The Huffington Post was supposed to give them a bigger anchor into these businesses yet their ad revenue increases have not materialized. Credit: Bloomberg News AUGUST 2011

If AOL were to be taken over by a private equities firm the equity firm would likely sell off units that would have value and singularly could make a profit, keep some profitable units, and close down nonprofitable units. That leads to the question of how will the Patch.com fair? The Patch.com is losing lots of money operating in 23 states, with over 800  local “Patches”. Their operating costs are much higher than their ad revenues ($160 Million expenses verses maybe $25million in ad revenue). Average monthly Patch.com ad revenue is only about $2,500 per Patch. Would it be sold or would it be closed?

On Glassdoor.com, a site where reviews on companies are by the respective companies employee’s, one Virgina Employee stated “Always in fear that the company is going to go under one day. I believe in our mission and our goals, but it’s continually not reflected in the numbers.”  A marketing manager stated “No money in the place at all”. In a lot of the reviews employees claim they have a fear of layoffs and salary cuts.

From the Business Insider:    “AOL knows a $130 million loss on Patch is not a number that will make its remaining investors happy. So, it probably wants to come up with something it can tell them to keep them from pushing the stock even lower.” and “Because Patch’s traffic is so tiny, we have always assumed that its revenues are too. So have AOL’s investors, many of whom dumped the stock after Armstrong refused to talk about Patch revenues during AOL’s last earnings call.”  He says that Patch sales people are able to look at a Salesforce.com interface and see a revenue number for each of Patch’s 840 towns. He says: “I can tell you they were doing around $2 million per month in total revenue and there are national partnerships that don’t show up in that number so I am guesstimating they will clear $25 million this year in revenue.”” These numbers show that the patch is spending $160 million in expenses per year and that loss will allow them to burn through operating cash flows about another 12-14 months before AOL may have to declare bankruptcy, especially with the loses in their other divisions.

This may be why Scott Colontonio’s (Director of Sales) departure comes a month after AOL’s Senior Vice President of local sales Mike DeLuca left the company.

We have noticed that the posts and stories from other local Patch towns are getting more and more intermingled with our local Patchs’ posts and stories, maybe the consolidation process is starting. AOL has started to ask editors to do ad sales in some areas. This gives them even less time to write articles never mind writing any investigative articles.