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AOL shares sink as its websites still lose money

By Jennifer Saba

(Reuters) - AOL Inc shares tumbled 10 percent on Wednesday after it posted another loss in its content group, reviving concerns that the company's profits were still mostly coming from a shrinking dial-up platform.

The stock's plunge was the second-worst decline in 18 months, and follows what had been a 67 percent rise over the last year.

"The core issue with this company is can they make content profitable?" said Ben Schachter, an analyst with Macquarie Research. "What you see every quarter is the only thing making money is the membership group. They are clearly going in the right direction, but we want to see more progress."

For the past several years, AOL has been trying to transform itself into a media destination with a stable of sites like the Huffington Post and Patch. It's a change from the days when it was best known as an Internet access business with free-trial CDs that clogged mailboxes.

AOL Chief Executive Tim Armstrong has invested heavily in content, including plowing well over $100 million into Patch, a group of hyperlocal websites that covers neighborhood news and events.

Even with all of that spending, the legacy subscription service is still the most profitable part of the company. The membership group, which includes subscriptions, posted operating profit of $146.4 million in the quarter.

AOL's media sites turned in an operating loss of almost $5 million. Those sites, which include Patch, Huffington Post, Engadget and TechCrunch, lost almost $17 million in the year-ago period.

"Patch is still a money losing proposition," said Ron Josey, an analyst with JMP Securities, who estimated Patch lost $100 million last year.

Armstrong reiterated on a call with analysts he expects Patch to be profitable in the fourth quarter.

"If they can get to break-even by fourth quarter, I think that is a win," said Josey.

DISPLAY AD REVENUE RETURNS TO GROWTH

Some encouraging trends have emerged. Display ad growth was a bright spot, Macquarie's Schachter said. The ads, big splashy campaigns often featured prominently on websites, are an important benchmark for AOL because they command higher prices and better margins.

Yahoo Inc, a competitor, reported that first-quarter display ad revenue fell 11 percent.

Overall advertising revenue for AOL increased 9 percent to $359.2 million, including a 6 percent gain in domestic display advertising.

But it also reported a slowdown in network advertising - ads sold across platforms, sometimes for cheaper prices. That business was up 10 percent in the first quarter versus 31 percent in the fourth quarter last year.

"A lot of people are concerned on the future growth rates on its network (business)," JMP's Josey said.

Armstrong said in an interview that AOL focused its sales group on "higher value" display advertising, rather than on third-party network advertising.

Total company revenue increased 2 percent to $538.3 million, missing analysts' expectations of $542.1 million, according to Thomson Reuters I/B/E/S.

Net income rose 23 percent to $25.9 million, or 32 cents per share, and met analysts' expectations.

Before Wednesday's report, AOL shares had soared 67 percent in the latest 12 months, just slightly underperforming Yahoo.

(Reporting by Jennifer Saba in New York; Editing by Jeffrey Benkoe and Nick Zieminski)

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