AOL Earnings: Programmatic Platform Boosts Ad Revenues Yet Again

AOL (NASDAQ:AOL) reported its Q2 2014 results on August 6. The company reported 12% year-over-year growth in revenues, while the net income was flat at $28.5 million. In our pre-earnings note, we had stated that we will be closely following AOL’s programmatic advertising platform for revenue growth and that it will be a key growth driver for AOL going ahead. As expected, much of the revenue growth for AOL came from the growth of programmatic platform across the third-party network. Its third-party ads division grew by 60% year over year. Furthermore, AOL reported 6% growth in search and contextual advertising as its marketing efforts bore fruits. However, it witnessed 1% decline in display ads and 7% decline in core subscription revenues, which partially offset the growth in third-party revenues.

See our complete analysis of AOL here

Programmatic Platform Boosts Third-Party Display Ads Revenues

According to our estimates, the third-party display ads division constitutes over 35% of AOL’s value. In the second quarter, revenues from third-party display ads continued to witness growth. Revenues from this division grew by 60% to $194.3 million, driven by growth in the sale of premium formats across AOL’s programmatic platform, and by the inclusion of revenue from Adap.tv. Third-party network revenue grew 20% excluding Adap.tv. AOL is aggressively developing its programmatic ads platform to sell more ads on third-party sites. The company not only reported growth in the number of ads sold through the programmatic platform, but also an increase in revenue per page view. Furthermore, its DSP, SSP and Adap.tv reported triple-digit growth during the quarter.

We believe that a strong programmatic platform will be a key driver in boosting AOL’s revenues by closely matching an advertiser’s ads with relevant content inventory. RTB (real-time bidding) aggregates the impression slots offered across multiple ad networks and matches them (based on the advertisers target, budget and placement requirements) with the most appropriate ads. With relevant ads displayed across content, AOL can continue to charge higher revenue per page view (RPM) to advertisers. Currently, we expect revenue per page view to grow from $4.50 to $5.90 by the end of our forecast period.

Marketing Efforts Bolsters Search Ad Revenues

According to our estimates, the search ads division constitutes ~19% of AOL’s value. Search across AOL is powered by Google. In line with our expectation, revenues from this division grew by 6% to $98.9 million during the quarter. The growth was primarily due to increase in queries from AOL clients as AOL was able to engage them successfully. Furthermore, AOL stated that its search marketing efforts, which increased cost by $18 million during the quarter, also helped in boosting the queries across its properties. As the company plans to build sustainable search products in partnership with Google, we expect that its search revenues will be stable in 2014.

Shuttered Sites Marginally Affect Display Ads Division Revenues

According to our estimates, the display ad division constitutes approximately 30% of AOL’s value. The key drivers for this division are unique visitors count, revenue per page view (RPM) and page view per unique visitor. The revenues for this division were marginally down by 1% to $144.1 million. The decrease in global display revenue is primarily driven by a decline of $15.2 million related to shutdown, disposed or de-emphasized brands, including Patch. However, improved pricing related to growth in the sale of premium formats across AOL’s properties partially offset the decline in revenues. Premium format impressions and RPMs grew at double-digit pace year over year and quarter over quarter. Furthermore, the improvement in content offerings translated into overall growth in the number of unique visitors across AOL properties, which grew 18% year over year to 171 million. As a result, AOL was able to serve more ads to its users during the quarter. AOL continues to improve user engagement by offering premium content across its properties through its well known brands like HuffPost and ESPN etc. User engagement is important for AOL’s overall financial health as it not only increases unique visitors count, but also drives page views and RPM across properties. We currently forecast that the RPM on AOL properties will increase from $3.00 to $3.40 by the end our forecast period.

We are in the process of updating our AOL model. At present, we have a $37 price estimate for AOL, which is approximately 10% below the current market price.

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