AOL beats Street despite weak U.S. display ads

(Reuters) - AOL Inc reported better-than-expected quarterly results and said it intends to hand over to shareholders 100 percent of the proceeds from its patent sales to Microsoft.

Earnings blew past Wall Street forecasts, and revenue topped estimates despite lower premium ad sales in the United States.

AOL shares rose 4 percent to $26.63 in early trading on the New York Stock Exchange.

Display advertising - big splashy ads on Web pages that command high prices, an area where AOL is making a huge bet - hit a hurdle in the United States, where revenue fell 1 percent.

"I wasn't surprised that much," Benchmark analyst Clayton Moran said of the display ad revenue. "We saw similar weakness from Facebook and Yahoo.

"It could be an industry thing or that Google is gaining so much (ad revenue) share that other parties are losing."

Late in April, Facebook reported its first quarter-to-quarter revenue drop in at least two years, blaming seasonal advertising trends.

"I was not happy with the domestic display over the course of the first quarter," AOL Chief Executive Tim Armstrong said on a conference call. "A lot of it was a sales strategy off tune."

AOL expects domestic advertising revenue to return to growth in the second half of the year.

Overall, advertising revenue grew 5 percent in the first quarter on strong growth in third-party network ads and international display ads.

Since its spinoff from Time Warner in 2009, AOL has been attempting to transform itself into a media destination dependent on advertising revenue, while at the same time winding down its lucrative dial-up service.

The company has snapped up a host of high-profile media properties, like the Huffington Post and TechCrunch, and has poured millions of dollars into a network of neighborhood news sites called Patch.

Patch has been a lightning rod for AOL -- the company has spent about $150 million on the effort so far -- and investors are eager to see it turn a profit.

AOL executives said on the call that the company expects Patch to be profitable in 2013 and that it should generate $40 million to $50 million in revenue this year.

First-quarter net income rose to $21 million, or 22 cents per share, from $4.7 million, or 4 cents per share, a year earlier.

Revenue fell 4 percent to $529.4 million but beat analysts' average forecast of $526.5 million, according to Thomson Reuters I/B/E/S.

RETURN TO SHAREHOLDERS, LOOMING PROXY FIGHT

In April, AOL agreed to sell the majority of its patents to Microsoft Corp for about $1 billion. Microsoft is selling the patents to Facebook.

AOL executives said on the call that the company intends to pass on 100 percent of those proceeds to shareholders. When the sale was announced, the company said it expected to turn over "a majority" of the proceeds to investors.

The change comes as AOL faces a looming proxy fight with one of its largest shareholders, activist hedge fund Starboard Value. Starboard contends that AOL is not doing enough to return value to shareholders and has nominated three directors to the AOL board. One point that Starboard has been pushing for is a 100 percent return of the patent proceeds to shareholders.

Armstrong said on Wednesday that turning over all patent sale proceeds to shareholders likely will not dissuade Starboard from agitating for board seats at AOL's shareholder meeting in June.

"A resolution (of the dispute) would be great. I don't see any resolution on the horizon right now," he said.

(Reporting By Jennifer Saba. Editing by Maureen Bavdek, Bernadette Baum and John Wallace)