AOL Pre-Earnings: Growth In Ads Revenue Growth In Focus

AOL (NYSE:AOL) is set to release its Q4 2013 earnings Thursday, February 6. While we expect the company to discuss the sale of its hyper local website patch.com in this earnings announcement, most of the focus will be on the growth in company’s core display ads business, which was bolstered by the acquisition of Adapt.tv last year. We are specifically looking for guidance on performance metrics like unique visitors and page views per visitor across AOL’s websites and third-party properties. Moreover, we continue to monitor the results of its search ads division, which has posted decent growth in the past few quarters. Furthermore, we expect the company to disclose its strategy for revenue growth in 2014.

See our complete analysis of AOL here

Focus On New Content Deals

According to our estimates, the display ads division, together with display ads revenues on third-party websites, constitutes approximately 50% of AOL’s value. The key drivers for this division are unique visitor count, revenue per page view (RPM) and page view per unique visitor. In order to increase user engagement and count, the company tied up with premium content providers to improve its content library in the previous quarters. We expect the company to disclose any new content deals its forged during the quarter. We believe that improved content will drive the monthly unique visitor count at AOL, and thus help the company in attracting more advertisers to its properties.

RTB Revenues  To Boost Revenues

To increase its popularity among advertisers, AOL is aggressively developing its programmatic ads platform or RTB, which closely matches an advertiser’s ads with relevant content inventory, to sell more ads on third party sites. This strategy paid off in Q3 as AOL’s programmatic platform was the chief contributor to the growth of third party display ad revenues. We expect that programmatic buying will once again bolster AOL’s revenues in Q4, and are closely monitoring the ads sold through the RTB platform.

Video Ads To Fillip Revenues

The company acquired Adapt.tv, a RTB for video ad sales, to cater to the growing video content industry. Since the acquisition, it has catapulted AOL to #1 position in terms of the number of ads served in the U.S. ^[1] We expect that much of the growth in AOL’s revenue will come from higher sales of video ads across its properties and third party networks. With this earnings announcement, we will continue to monitor growth in revenue from its programmatic platform, especially growth in adapt.TV, as this can drive revenue and help AOL maintain its competitive advantage over companies such as Yahoo and Google.

Performance Metrics Of Search Division In Focus

According to our estimates, the search ads division constitutes ~19% of AOL’s value. Search across AOL is powered by Google. Google reported improvement in ad volume for its Q4 results, due to the enhanced campaigns program. ^[2] We believe that this program will increase the number of searches performed across AOL properties from smart mobile devices. While AOL’s market share in the U.S. search market industry is on a decline, its click-through rates and revenue per search (RPS) should improve due to availability of wide spectrum of content across its properties. ^[3] Therefore, we expect that revenues for AOL’s search ads division to increase Q4 and beyond.

Guidance On Strategy For 2014

Over the past few quarters, AOL has been selectively selling its non-profitable products so that it can focus on its core content verticals and offer new products for these profitable services. As per this strategy, the company sold off majority stake in its loss making hyper locale website patch.com. ^[4] With the sale of Patch.com, we expect AOL’s margins to improve in the future as this website was eroding AOL’s profitability without substantially increasing its revenues.

In this earnings announcement we expect the company to disclose the strategy for its core ads business, and how the sale of non performing venture affects its margins. We believe that the company should continue to build its content library and at the same time look to improve user experience so that it can build its reputation among advertisers. This can translate into higher RPM and RPS for AOL, and help drive revenue in the future.

We currently have a $34 price estimate for AOL, which is 28% below its current stock price.

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1. Read Adapt.TV To Boost AOL’s Revenue for more on this [↩]
2. Read Google Earnings: Revenues Buoyed By Higher Ad Sales [↩]
3. comScore Releases December 2013 U.S. Search Engine Rankings, January 15 2013, www.comscore.com [↩]
4. Read AOL Gives Up Local News Service Patch As It Fails To Generate Profits [↩]