Recovery On Tap for AOL After Recent Struggles

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AOL ( AOL ), which competes with Yahoo ( YHOO ), Google ( GOOG ) and Microsoft ( MSFT ) in the online advertising market, recently brought about another round of layoffs, announcing a 20% workforce reduction. This is not the first time AOL has cut its workforce, as the company previously reduced its workforce by one-third in 2009.

AOL's Struggles Continue

AOL has struggled to keep pace with the overall U.S. advertising market over the past year. AOL's revenues from its U.S. display advertising business declined from $514 million in 2009 to $473 million in 2010, while the overall U.S. online advertising market increased from around $23 billion in 2009 to $26 billion in 2010.

Below we take a look at AOL's moves to offset the revenue decline by cutting costs. We currently maintain a $23.94 price estimate for AOL stock , about 25% above market price.

See our full analysis and $23.94 price estimate for AOL

AOL Looking to Remove Redundancies

AOL recently announced job cuts to eliminate redundancies resulting from AOL's acquisition of "The Huffington Post". AOL acquired Huffington Post to strengthen its social media content (see AOL's Huffington Post Acquisition Targets Greater Social Media Impact ).

Previous job cuts were a result of closing down a number of operations. In 2010, AOL sold a few business divisions like Bebo and ICQ. The company also reduced its operations in a few European countries, particularly France and Germany. These countries were unprofitable for AOL, and hence it decided to reduce or completely shut down operations there.

Top-Line Growth Needed by AOL

Although AOL might be making a sound strategic move in removing redundancies, the company must still address its struggling top-line revenue growth. AOL's overall revenues declined from $3.2 billion in 2009 to $2.4 billion in 2010. Although the company's SG&A expenses declined from job cuts enacted last year, the cost benefits were not enough to offset the larger revenue decline. Looking at this effect more directly, we can see that AOL's SG&A expenses (as a percentage of revenues) actually increased from 15% in 2009 to 19% 2010.

Going forward, we anticipate a turnaround in this metric, as revenues grow faster than the absolute SG&A expense. For this to happen, AOL will need to focus its efforts on growing the top-line. As one step in the right direction, the company has already undertaken a few initiatives to create new opportunities for ad monetization (see AOL Righting its Ad Business Supporting $24 Value ).



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AOL , GOOG , MSFT , YHOO

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