AOL Earnings Preview: Focus On Growth In RTB And Ads Revenues
AOL (NYSE:AOL) is set to release its Q3 2014 earnings Thursday, November 6th. While the company posted 12% year-over-year growth in total revenues for the June quarter to $606.8 million, its net income was flat at $27.4 million. 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 Q3 as well, and are closely following the revenue growth from the ad platform. Additionally, company’s search and contextual advertising business witnessed a growth in revenue during Q2, and we expect the company to report marginal improvement in revenues in Q3 as well. We also anticipate a marginal growth in display ads revenues in Q3 despite the overhang of shuttered sites, which impacted growth in Q2. The growth in ad revenues will be driven by the content on AOL properties, and AOL has done well to sign new content deals for both its video and mobile offerings. 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
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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 Q2 2014. We expect video ads to once again contribute heavily to third-party display ads revenue as AOL is consistently ranked among 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 grew in Q2 FY14 due to a good showing from the enhanced campaigns program launched by Google in Q3 FY13. Furthermore, the growth was driven by an increase in queries from AOL clients as AOL was able to engage them successfully, and AOL’s search marketing efforts, which increased cost by $18 million during Q2. We expect this trend to continue in Q3 as the company plans to build sustainable search products in partnership with Google, and improve content across its properties. As a result, during 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.
Display Ads To Stabilize
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. In Q2, 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 disposed or de-emphasized brands, including Patch. However, we expect display revenues, excluding revenues from shuttered sites, to grow marginally in Q3, primarily due to improvement in pricing related to growth in the sale of premium formats across AOL’s properties and the use of the RTB platform, which will help the company to sell its unsold inventory. Furthermore, the improvement in content offerings will augur well for the overall growth in the number of unique visitors across AOL properties, which grew 18% year over year to 171 million in Q2. As a result, we believe that AOL will be able to serve more ads to its users during the quarter. With this earnings announcement, we will continue to closely monitor the performance metrics for this division to ascertain the role of new content.
We currently have a $38.52 price estimate for AOL, which is 10% below the current stock price.
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Notes:
- comScore Releases September 2014 U.S. Desktop Online Video Rankings, October 22 2014, www.comscore.com [↩]