AOL (AOL) reports on Wednesday November 3rd and if recent history is a good indication, the numbers will not be overwhelming. Google (GOOG), Apple (AAPL), Gannett (GCI), Yahoo (YHOO) and Microsoft (MSFT) have all given us a good feel for where search advertising went this quarter. Is there any reason to believe AOL will do any better than these companies or is it a good bet they will actually do worse? Keep in mind that the previous year’s numbers had already taken a huge dive so this should really be the start of a rebound, or a good indication which companies may not have what it takes to compete.
This quarter's reports show some growth, including Google (+16%), Yahoo (+17%), Gannett (+10%), McClatchy (+1.6%) and Microsoft (+8%) in terms of display or digital advertising. Not all these numbers are exactly apple to apple comparisons, as every company likes to break out the details that make them look best. Now the question is, how will AOL report on Wednesday? Looking back at last quarter, AOL reported a 27% drop in revenue in the advertising sector. For shareholders' sake, I will not mention the dreadful dial-up and online business that should provide the company with another enormous write-off down the road. I think the best case scenario would be if AOL reports a flat quarter in terms of advertising revenue, and the worst case scenario would be a roughly 10% decline. Anything more should raise some serious warning flags given how weak the previous year’s numbers were and the rebound in the advertising sector.
Of course, AOL has just launched its Project Devil advertising platform. This could be a bright spot going forward for AOL. They seem to understand that the interactive portion of online advertising is critical to online advertising success.
What may even be more enlightening than actual earnings could be the status of certain litigation between AOL (Tacoda) and ValueClick (VCLK), Yahoo (YHOO) and Augme Technologies (AUGT.ob). This summer, AOL quietly settled with ValueClick for an unknown sum. This is a ValueClick technology that they acquired in 2002 from Be Free for $120M, which had previously been validated in a large - over $100M - settlement with Yahoo and now with settlements with Revenue Science and AOL. The Yahoo case, 09-cv-03774, involves another purchase by AOL (Quigo). One of the patents at issue is the same one Yahoo (Overture) used to sue Google in 2002, the 6,269,361 patent, filed in 1999 when Overture was still known as GoTo.com. Yahoo inherited that suit when it bought Overture in 2003. The two companies settled the suit in 2004, with Google agreeing to pay between $260 million and $290 million in stock. Once again, this is a validated patented technology that AOL is exposed to from purchase of another company.
According to recent filings, this case seems to be heating up. The Augme case involves patents 6,594,691 and 7,269,636 resulting from an original October, 1999 filing and once again involves AOL's purchase of Tacoda, just like the ValueClick suit, and has been working its way through the courts. Recent settlement talks have not produced any new filings to date.
Let’s all face it. Tim Armstrong has done a good job keeping AOL in the news and afloat despite the company failing to be overly relevant these days. One has to assume that his plan was really never more than trying to pretty up the old girl just enough to get her asked to the dance in the form of getting it acquired. I put the odds of AOL going toe to toe as a stand alone company with Google and others at slim and none. In the all important mobile race, they haven’t even made it to the starting line, while the competition is at a full sprint. They are already so far behind in mobile that it’s sadly laughable. Assuming Armstrong’s strategy is at it appears, one has to wonder how they can be so naive to possibly expect that any sophisticated buyer would write a multi-billion dollar check while ignoring the seemingly very material liabilities mentioned above. Just because AOL has left some of them auspiciously absent from corporate filings does not mean they fail to exist. Armstrong would be wise to know that just because his predecessors failed to realize and acknowledge the severity of some of these patent infringement issues, a buyer of his company may not be as forgiving.
The good news for AOL is that with the recent divestiture of assets of $144M, they now have over $750M in cash and relatively low debt. A multi-hundred million settlement of certain lawsuits, swept into the background, seems much easier to resolve now than when they first spun off from Time Warner (TWX). The acquisition of Bebo is another glaring example of AOL’s previous disastrous and failed dealings. Let’s not forget that just a few short years ago, AOL acquired them for $850 million and they recently divested it for a price said to be just $10 million! Did anyone bother to explain to the executives behind this transaction that it is shareholders' money they are playing with?
Disclosure: Long AUGT.ob