By Jennifer Saba
NEW YORK (Reuters) - AOL Inc reported a surprise second-quarter loss on Tuesday, citing weaker-than-expected advertising growth that sent shares of the company plummeting as much as 31 percent on Tuesday.
The company, which Time Warner spun off after a disastrous decade-long merger, is trying to regain its status as one of the world's most popular online destinations by investing in efforts such as hyperlocal news network Patch and buying the Huffington Post.
Advertising revenue rose 5 percent to $319 million. But investors cast an eagle eye on premium ad revenue, which was weaker than expected, suggesting that rivals like Facebook are stealing ad share.
Sales of display ads -- big splashy units that appear on Web pages -- gained 14 percent, shy of the 25 percent forecast of Evercore Partners analyst Ken Sena.
While AOL has made progress turning its ad revenue around after several quarters of declines, Chief Executive Officer Tim Armstrong said display growth should have been stronger.
"We had the ability to capture more than we did," Armstrong said during a call with analysts.
Integration of the Huffington Post into AOL's properties had to do partly with the slowdown in June display ad sales, with July trending the same, said Arthur Minson, chief financial officer of AOL.
Investors punished AOL shares, causing a halt in trading twice during the morning because of volatility.
AOL reorganized its sales force at the end of July as part of an effort to boost advertising demand. At that time, its head of advertising, former Google executive Jeff Levick, left the company.
"From an investor standpoint, didn't we go through this last year?" Sena said. "To be honest, you have so many buying opportunities out there where the stocks have strong fundamental stories."
Armstrong insisted on the call that the shake-up was not another reorganization, one of several that AOL has been through over the past couple of years, and that the sales force remained intact.
"It's about us improving the operations of our advertising business globally," he said.
The company is still waiting for sales at Patch, an ambitious project consisting of 800 local community websites, to kick in.
"Given disappointing display trends, we believe 2012 needs a significant Patch ramp or material help for Huffington Post from political advertising in order to achieve flat EBITDA," wrote Benchmark analyst Frederick Moran in a note to investors.
"The current outlook is bleak," wrote Moran, who chopped AOL's price target to $14 from $23 per share
AOL is up against Google as well as newer rivals like Facebook and Twitter. Its share of online U.S. ad revenue is expected to fall to 2.7 percent this year, down from 3.4 percent in 2010, according to research firm eMarketer.
Revenue fell 8 percent to $542.2 million on a 23 percent drop in subscription revenue. Analysts were expecting revenue of $530.4 million.
The company said its second-quarter loss narrowed to $11.8 million, or 11 cents per share, from $1.06 billion, or $9.89 per share, a year earlier, when it took a goodwill writedown of $1.41 billion.
Analysts on average were looking for a profit of 4 cents per share, according to Thomson Reuters I/B/E/S.
(Additional reporting by Saqib Iqbal Ahmed and Sayantani Ghosh in Bangalore; Editing by Saumyadeb Chakrabarty, Lisa Von Ahn, Gunna Dickson and Robert MacMillan)