While its internet subscription business continued to shrink at over 20% for Q3 2011,  AOL’s (NYSE:AOL) third party advertising revenues saw close to 30% growth, suggesting that the investments such as Project Devil did improve monetization for AOL’s advertising network. While AOL would not be disappointed with Q3 2011 results unlike the rest of 2011, it still needs to do more to capitalize on the mobile and social arena, where Google (NASDAQ:GOOG) and Facebook continue to retain a stronghold.
Both Patch and Devil Helped AOL’s Advertising
While AOL’s gross margins certainly took a hit, falling from +40% last year to just around 30% at present, the investments have yielded some fruit with Project Devil’s adoption increasing by 50% over last quarter. Additionally, Patch, AOL’s community-specific news site, also crossed the 10 million unique visitor mark.
While low gross margins would certainly hit AOL this year, it should be heartening for investors that the company’s advertising business is at least on the road to recovery. AOL is also pursuing its Editions magazine for tablets aggressively,  hoping to catch up on the mobile trend. This can provide an even further upside to traffic if user adoption takes off.
We have a revised price estimate of $14 for AOL stock, which is roughly in line with the current market price. The revision is based on changing our estimates for AOL’s revenue and margin forecasts and the company’s net cash/debt position.Notes: