AOL (NYSE:AOL) has invested heavily in its hyperlocal news project Patch.com, but so far it has failed to turn a profit or meet its revenue goals. Despite Patch redesigns earlier this year, which helped grow web traffic by 10% y-o-y in June, have not gained enough traction. In our opinion, a strong social offering is key for AOL as it can attract new users and drive page views. However, the company has largely missed out on this trend with Patch’s weak social offering. Although, Patch had grown to about 900 sites and over 1,200 employees during the past three years, AOL has recently laid off close to 550 Patch employees and exited 400 of the non-viable patch sites. In this article, we look at how AOL plans to turn Patch around by cutting its employee costs and focusing on profitable markets.
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AOL had hoped that Patch would earn between $40 million and $50 million in 2012, but it did not meet the target.  While AOL has not disclosed Patch’s revenue in the recent earnings release, we estimate its revenues for 2013 based on a leaked document from Patch that details its year-to-date advertising income targets and bookings.  At Patch’s current ad booking rate, it can make $25 million in revenues in 2013. However, if AOL is able to keep up with its ads sales target, Patch could bring in up to $40 million in 2013.
AOL plans to shut down 400 non-viable Patch sites. This will negatively impact Patch’s revenue as the value of a network of hyper-local websites will diminish due to its more limited reach. Additionally, by cutting editorial staff, Patch is likely to scale down its local content and with it, trim page views. A decline in page views will impact the ads that can be viewed and sold by AOL.
Layoffs Can Help To Cut Cost
One of the primary costs at Patch is employee cost. Since Patch’s revenue growth has failed to meet AOL’s expectations, the company has cut close to 550 jobs in August so as to address its profitability. While the website has some high cost employees such as software engineers who earn up to $120,000, other employees such as local editors and ad managers earn $45,000 per year on average.  This translates into employee cost of $60 million based on an average salary of $50,000. Since most of the staff laid off was editorial and ad staff at shuttered sites, we estimate that AOL will save $25 million in employee cost. This leads us to believe that Patch can breakeven by the end of 2013, if it can generate $40 million in revenues. However, if this strategy fails, Patch will continue to eat away at AOL’s profit.
We will continue to closely watch Patch’s progress in remaining half of 2013, so as to ascertain the financial health of AOL’s business. We currently have a $27 price estimate for AOL, which is approximately 20% below the current market price.