Analyst Slices AOL Outlook: Ads Are Weak And TAC Is Growing

Here's some more pressure on Time Warner to dump AOL sooner rather than later: JP Morgan analyst Imran Khan has a new report out, slicing estimates on the troubled internet unit. Khan sees a squeeze from both directions, lower ad revenue and higher traffic acquisition costs:

• "We now expect AOL advertising revenue of $2.4B in ’09, an increase of 8% Y/Y – compared to our previous estimate of a 12% improvement. Slower expected growth is due to a more cautious outlook for display and Platform A revenue in light of continued softening of the graphical ad market.

• "We believe that traffic acquisition costs (TAC) will drive Y/Y gross margin compression and an Adjusted OIBDA decline in ’09. We think the implication of a $100M Y/Y increase in TAC in the first half of ’08 due to a change in accounting may have been overlooked by the Street. Our analysis shows that TAC will grow 26% for full year ’08 and 7% in ’09.

What's more, Khan thinks TWX shares are being held back by the performance at the unit

• "TWX currently trades at 12.7% discount to the peer group ’09 PE. We think the stock performance relative to the peer group will continue to be affected by the operating challenges at AOL – maintain Neutral."

We know they're negotiating furiously to dump it to Yahoo. Per Khan's outlook, time is money on this one.