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
).