AOL Earnings Preview: Growth In Ad Tech Platform To Take Center Stage

AOL (NYSE:AOL) is set to release its Q1 2014 earnings Wednesday, May 7. The company reported an all time high ad revenues for Q4 FY13, largely due to the prolific use of its real-time bidding platform that enables advertisers to successfully place video and display ads across third-party websites. We expect this trend to continue in Q1 as well, and are closely following the revenue growth from ad platform. Furthermore, we continue to closely monitor the number of new content deals the company has signed for its sites as they are instrumental in boosting pageviews, searches and ad revenues. In addition to the revenue performance metrics, we also want to know how the cost controlling measures undertaken by the company in the last two quarters have fared.

See our complete analysis of AOL here

RTB Revenue Growth In Focus

According to our estimates, the third-party display ads division constitutes over 34% of AOL’s value. In the previous quarter, the  real-time bidding platform propelled revenues for this division. The sale of video ads through adapt.tv, a RTB for video ads, was one of the primary contributor to revenue growth in Q4 2013. We expect video ads to once again contribute heavily to third-party display ads revenue as AOL is consistently ranked amongst the top two properties for video ads in the U.S. ^[1]

Focus On New Content Deals

According to our estimates, the display ads division constitutes approximately 30% 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 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. With this earnings announcement, we will continue to closely monitor the performance metrics for this division to ascertain the role of new content. Additionally, we are expecting the company to disclose any new content deals its forged during the quarter.

Search Ads Revenues Under The Scanner

According to our estimates, the search ads division constitutes ~19% of AOL’s value. Search across AOL is powered by Google, which reported improvement in ad volume for its Q1 FY14 results. AOL’s search ad revenues failed to grow in Q4 FY13 despite good showing from the enhanced campaigns program launched by Google in Q3 FY13. In this earnings announcement, we expect its click-through rates and revenue per search (RPS) to improve due to availability of wide spectrum of content across its properties.

Cost Control Measures To Boost Margins

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. ^[2] With the sale of Patch.com and shuttering of under-performing properties underway, we expect AOL’s margins to improve in this quarter and beyond due to these cost control measures. In this earnings announcement we want to know whether margins for the company have improved.

We currently have a $41.55 price estimate for AOL, which is in line with its current stock price.

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1. comScore Releases March 2014 U.S. Online Video Rankings, April 18 2014, www.comscore.com [↩]
2. Read AOL Gives Up Local News Service Patch As It Fails To Generate Profits [↩]