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

AOL (NYSE:AOL) is set to release its Q2 2014 earnings Wednesday, August 6. While the company posted 8% year-over-year growth in total revenues for the March quarter to $583.30 million, its net income declined by 64% year over year to $9.30 million due to restructuring and asset impairment charges. The company reported growth in revenues 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 Q2 as well, and are closely following the revenue growth from the ad platform. However, company’s search and contextual advertising business witnessed a decline in revenue during Q1. Although the company continues to sign new content deals to bolster its ads business, in this earnings announcement, we want to know whether the deals that it signed over the past few years have had the desired effect on its ads revenues. 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.

See our complete analysis of AOL here

Real-time Bidding Revenue Growth in Focus

According to our estimates, the third-party display ads division constitutes over 35% of AOL’s value. In the previous quarter, the real-time bidding (RTB) platform propelled revenues for this division. The sale of video ads through adapt.tv, a RTB for video ads, was one of the primary contributors to revenue growth in Q1 2014. We expect video ads to once again contribute heavily to third-party display ads revenue as AOL is consistently ranked amongst the top three properties for video ads in the U.S. ^[1]

Search Ads Revenue Under the Scanner

According to our estimates, the search ads division constitutes 18% of AOL’s value. Search across AOL is powered by Google, which reported improvement in ad volume for its Q2 FY14 results. AOL’s search ad revenues failed to grow in Q1 FY14 despite good showing from the enhanced campaigns program launched by Google in Q3 FY13. The decline was primarily due to fewer queries from AOL clients in international markets and a decline in the number of subscribers. 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.

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, helping the company to attract 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 in Q1, the number of impression sold declined as AOL failed to sell some of its ads inventory. In this earnings announcement, we want to know whether the company was able to reverse the trend for its ad impressions.

Cost Control Measures in Focus

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. However, despite these measures, the company reported an increase in costs as restructuring cost and asset impairment cost lowered its profitability by $22 million in Q1. While we expect AOL’s margins to improve in this quarter and beyond, due to cost control measures such as shuttering of under-performing properties,  we are eager to see if, in this earnings announcement, margins for the company have improved.

We currently have a $37.79 price estimate for AOL, which is in line with its current stock price.

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1. comScore Releases June 2014 U.S. Online Video Rankings, July 21 2014, www.comscore.com [↩]