AOL Q2 Earnings Preview: What We’re Watching

AOL (NYSE:AOL) is expected to announce its Q2 earnings results on Tuesday, August 9th. For Q2, AOL’s search ads and subscription business will continue to struggle after posting a 21% and 24% decline in revenues, respectively, for Q1. The pick up of Huffington Post might provide some respite to this performance. In the long-term, AOL can also be aided by technology-driven initiatives in its third party services, such as the recently launched Editions magazine app. ^[1] AOL competes with other search and display ad giants such as Google (NASDAQ:GOOG), Facebook and Yahoo (NASDAQ:YHOO).

We currently maintain a $22 price estimate for AOL stock, about 35% above market price.

AOL’s Search & Subscription Waning Under Competition

According to comScore, AOL’s search share in the U.S. declined from 1.4% in April 2011 to 1.3% in June 2011. ^[2] The company continues to struggle against search giants like Google to hold on to its existing search share with even the company’s guidance projecting a steep decline in search revenue. ^[3] AOL’s legacy dial-up Internet access has also seen a drastic drop in subscription as better broadband products from companies like Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC), AT&T (NYSE:T) and Verizon (NYSE:VZ) take over. Unless AOL’s display business shows sufficient growth, there could be a significant downside to AOL’s stock, given that search ads and subscription still contribute a bulk of its business.

Huffington Post shows Promise

One positive aspect that emerged this quarter was Huffington Post’s performance, which was acquired by AOL in Feb 2011. ^[4] In May 2011, Huffington Post overtook NYTimes.com for the first time  in unique visitors, clocking in 35.6 million unique visitors as compared to 33.6 million for The New York Times. ^[5] The site has undoubtedly benefited from redirects from AOLNews.com and played its part in growing AOL’s global display revenue for the first time since Q4 2007. ^[6] We would continue to follow AOL’s acquisitions closely and their impact on its display ads business for Q2 2011.

See our complete analysis for AOL’s stock here

1. AOL Launches Daily “Magazine” App [↩]
2. comScore Releases June 2011 U.S. Search Engine Rankings [↩]
3. AOL Q1 2011 10Q SEC Filing [↩]
4. Reuters: AOL to buy The Huffington Post for $315 million [↩]
5. Huffington Post traffic surpasses NYTimes.com [↩]
6. AOL Reports Q1 Earnings [↩]