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AOL sings soothing profit lullaby to nervous investors

But advertising's going down the toilet, says shareholder

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AOL has moved to quieten down investors after activist shareholders Starboard Value LP accused the web biz of making "staggering" losses in its traditional areas and sinking money in unproven new ventures.

Starboard has just bought a 4.5 per cent stake in the company, according to Reuters, and promptly criticised AOL for a crash in display advertising revenue and its investment in little enterprises, such as local journalism initiative Patch. AOL lost as much as $500 million last year in its display advertising business, an area where it faces stiff competition from Google and Facebook.

Responding today in the WSJ, AOL said it had cut costs, sold noncore assets and made "significant investments for our future" during the past two years.

AOL's share price today stands at $15.13, down from a yearly high of $24.91 in January.

Though AOL's content business was looking hopeful, said Starboard CEO Jeffrey Smith, investors still see their legacy dial-up internet businesses as the cash cow of the company, ascribing almost all of AOL's value to its 3 million dial-up subscribers.

"This valuation discrepancy is primarily due to the company's massive operating losses in its display business, as well as continued concern over further acquisitions and investments into money-losing growth initiatives like Patch," he said in the missive.

Between the end of 2009 and 2010, AOL has seen revenues fall from $3.1bn to $2.3bn. This contributed to a reduction in the bottom line from a gain of $248.8m to a loss of $782.5m. ®

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