Shares of the New York-based Internet company, AOL Inc. (AOL - Snapshot Report) plunged over 10% in yesterday’s trade after the company posted lower-than-expected top-line results for the fourth quarter of 2014. The company’s revenues of $710.3 million fell short of the Zacks Consensus Estimate of $727.0 million.

However, on a year-over-year basis, AOL’s revenues increased 4.6% mainly driven by strong growth registered in global advertising and other revenues. Global advertising and other segment’s revenues went up 8% year over year to $562.2 million mainly on the back of higher user base, increased pricing and sale of premium video formats.

On the other hand, AOL’s revenues from subscription segment declined 5% year over year to $148.1 million primarily due to 11% drop in subscriber base, partially offset by 5% improvement in average monthly subscription revenue per AOL subscriber.

Gross profit came in at $184.1 million, marginally lower than the year-ago quarter level of $184.4 million. Gross margin contracted 130 basis points (bps) year over year to 25.9% mainly due to increased traffic acquisition costs due to heavy marketing efforts undertaken to boost searches.

However, with its efficient cost management initiatives, the company was able to reduce its adjusted operating expenses to $97.8 million, down 1.8% from the year-ago period.

AOL’s adjusted operating profit improved 1.8% year over year to $86.3 million. However, operating margin contracted 40 bps to 12.1% mainly due to lower gross margin, partially offset by reduced operating expenses, as a percentage of revenues.

Further, AOL’s adjusted net income surged 65.6% to $58.8 million mainly due to lower tax expenses. The company’s adjusted earnings per share were 78 cents compared with 53 cents posted in the year-ago quarter which handily surpassed the Zacks Consensus Estimate of 55 cents. Lower tax expenses during the quarter were mainly due to favorable impact from research and development tax credits.

AOL Inc. - Earnings Surprise | FindTheBest

Balance Sheet

At the end of 2014, AOL had $488.7 million of cash and cash equivalents and no outstanding borrowings under its revolving credit facility. During the fourth quarter, the company generated cash flow of $122.5 million from operating activities and a free cash flow of $85.8 million. Furthermore, in 2014, the company repurchased approximately 2.5 million shares for $99 million. As of Dec 31, 2014, the company had $110 million remaining under its current share repurchase authorization.

Restructuring Plans for 2015

Concurrent with the fourth-quarter results, the company also issued its strategic plans for 2015. AOL described 2015 as an investment year and stated that the year may witness several major restructuring activities, such as lay off of various ad-sales staff as it intends to focus more on programmatic advertising and popular content brands. The company hinted that its first half results may be negatively impacted by its restructuring plans.

Our Take

The company reported mixed results for the fourth quarter, wherein earnings surpassed the Zacks Consensus Estimate but the top line missed the same. However, year-over-year comparisons were favorable. During the quarter, the company witnessed several positives including growth in user base, increase in pricing and sale of premium video platforms.

However, we are concerned about the company’s growth prospect as it provided a tepid outlook for 2015. According to the company, the significant investments planned for 2015 are likely to negatively affect the first-half results.

Further, significant competition from Yahoo! Inc. (YHOO - Analyst Report) and Google Inc. (GOOGL - Analyst Report) in the Internet information provider space remains a major concern.

Currently, AOL carries a Zacks Rank #4 (Sell). A better-ranked stock in the Internet services industry is Borderfree, Inc. (BRDR) with a Zacks Rank #2 (Buy).