AOL Shares Plunged: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: AOL (NYS: AOL) dropped 31% in intraday trading today after missing earnings expectations and issuing disappointing guidance.

So what: Non-GAAP EPS of -$0.11 fell well short of the $0.04 consensus estimate, and deteriorated from $0.66 in the year-earlier quarter. Revenue fell 8% year over year, as display ad revenue growth of 14% and total ad revenue growth of 5% of were more than offset by a 23% decline in subscription revenue and 20% decline in other revenue.

Now what: Profits declined because of both the revenue decline and rising costs of revenue. The higher costs owed to increases in investment in "areas of strategic focus including acquisitions," incentive compensation expense, and traffic acquisition costs related to third-party ad revenue. On the earnings conference call, the company's CFO guided 2011 adjusted EBITDA to $340 million to $370 million, well below the $417 million consensus forecast and a decline of 50% to 55% year over year. One analyst summed it up nicely: "The turnaround still remains questionable."

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At the time this article was published Fool contributor Cindy Johnson does not own shares of any company named above. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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