By Jennifer Saba
(Reuters) - AOL Inc on Wednesday reported its quarterly profit fell, missing expectations as it sheds businesses and upgrades its advertising operations, sending its stock tumbling 22 percent.
The digital and media entertainment company posted first-quarter adjusted earnings per share of 34 cents, falling far short of the average analyst estimate of 45 cents and overshadowing growth in revenue and advertising sales.
"The first quarter is weak, and we think the market is overvaluing the quarter, rather than looking at the strategic vision of AOL," said Laura Martin, an analyst with Needham and Co.
AOL executives said on a conference call with analysts that the first quarter tended to be soft because of seasonality.
Still, AOL said first-quarter revenue rose 8 percent to $583.3 million, topping estimates of $577.7 million, according to Thomson Reuters I/B/E/S.
Revenue was boosted in part by a 43 percent surge in ad sales through AOL's automated electronic exchange to $230.8 million, helped in part from the acquisition of video advertising platform Adap.TV.
AOL, which owns the Huffington Post website and the TechCrunch blog, has been investing in advertising, especially in the so-called programmatic side, referring to the machine-buying and selling of digital advertising.
In an interview with Reuters, AOL Chief Executive Officer Tim Armstrong said he only saw upside in automated buying and selling. "We believe that Madison Avenue will get mechanized over the next decade and so will the content business."
The company has been unloading properties, including Patch, its network of hyperlocal websites, and has unveiled a one-stop advertising platform aimed at changing the media-buying process for digital advertising.
On Tuesday AOL said it was acquiring Convertro Inc, a platform that helps advertisers manage spending budgets across different media, for $101 million.
Advertising is an important revenue stream for AOL, and its growth is critical to its overall performance, especially as subscription revenue from its dial-up service slips away.
"Our view is that 2014 is going to be a good year for AOL," Needham's Martin said, citing the company's video, mobile and automated ad platform business.
Net income attributable to AOL fell to $9.3 million, or 11 cents per share, from $25.9 million, or 32 cents, a year earlier. The profit drop was due to restructuring charges and a higher tax rate.
AOL shares dropped $9.64 at $34.25 on Wednesday in mid-morning trade.
(Additional reporting by Soham Chatterjee; Editing by Simon Jennings and Jeffrey Benkoe)
