AOL stock tumbles after weak results

NEW YORK (CNNMoney.com) -- AOL Inc. shares plunged Wednesday after the Internet company reported declining sales and a dwindling subscriber base.

Shares of AOL (AOL) were down more than 12% at $24.58 at midday.

The selloff came after AOL said sales fell in the first quarter and signaled in a conference call with analysts that growth will be sluggish for the remainder of 2010.

"It was a very disappointing quarter," said Ben Schachter, an analyst at Broadpoint AmTech. "The message is that the turnaround is going to take longer than expected."

AOL said total sales fell 23% in the first quarter to $664.3 million. Subscription revenue plunged 28%, while advertising sales fell 11%.

Revenue from both search and display advertising suffered double-digit percentage declines in the quarter, and the company said it expects ad sales to continue falling for the rest of the year.

Tim Armstrong, AOL chief executive, stressed that demand for the company's products and services is strong, and that the results reflect the "tough decisions" the company has made to strengthen its position "in a competitive marketplace."

"We proactively chose not to take short-term revenue strategies," he told analysts in a conference call.

AOL posted net income of $34.7 million, or 32 cents per share, in the first three months of 2010. That's down from $82.7 million, or 78 cents per share, in the same period last year.

Excluding certain items, including $23.4 million for restructuring, the company said it earned 79 cents per share.

The results were well below the levels Wall Street analysts had forecast. Analysts surveyed by Thomson Financial had expected earnings of 70 cents per share on sales of $679 million.

AOL continued to lose dial-up subscribers as users flocked to higher speed Internet connections. AOL's subscription base fell 26% to about 4.6 million from 6.3 million a year earlier.

But the company said it made progress in the quarter on its long-term goals, including cost cutting and "scaling" its sales force. AOL reduced operating expenses by $139 million in the quarter by cutting payrolls and exiting unprofitable businesses.

Separately, AOL announced an agreement with Digital Sky Technologies, an Internet company targeting Russian-speaking markets, to sell its ICQ instant messaging service for $187.5 million.

The company also reiterated that it is evaluating "strategic alternatives" for Bebo, which could include a sale or shutdown of the struggling social networking site this year.

AOL has been trying to reinvent itself as a content and advertising company since it regained its independence from media giant Time Warner (TWX, Fortune 500) late last year. Time Warner, which owns CNNMoney.com, spun AOL off to shareholders in December, ending what many experts said was the most disastrous corporate marriage of all time.

While AOL has struggled to gain traction in sales of lucrative display advertising, the company's stock has largely outperformed larger rivals. Shares of AOL are up over 20% since the stock began trading at the beginning of the year. By contrast, Google (GOOG, Fortune 500) is down nearly 15% and Yahoo (YHOO, Fortune 500) has gained less than 1% year-to-date.