AOL’s Future: Content and Ads. That’s All.

AOL (NYSE:AOL) announced its earnings on May 9th, with a continued decline in its overall revenue, just in line with our expectations. While its advertising revenue was up 5% year-over-year, its subscription and other revenues dipped significantly resulting in a 4% overall decline. The growth in advertising revenue reached $330 million and was quite encouraging, which bodes well for AOL as it has been focused on its content properties and advertising as its major revenue engine and only growing business. ^[1]

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Content is king!

AOL has been heavily focused on its content properties to drive display advertising revenue, and has been lapping up popular online properties like Techcrunch and Huffington Post. Earlier this month, reports suggested that it might be looking to offload Techcrunch and Engadget for a neat profit, but apparently that’s not the case, as Tim Armstrong, the CEO of AOL, reaffirmed that they plan to invest further in those properties to increase traffic and ad revenue and not sell them off. Its recent patent sale to Microsoft added more than $1 billion to its coffers and should help it see its content strategy and restructuring efforts through.

We expect AOL to focus more on its mobile, social and local offerings to deliver content to users and drive advertising revenue in the coming years. AOL now has over 60 million smartphone downloads and around 40 million mobile unique users growing at 25% year-over-year. This quarter, most of the growth was driven by Huffington Post, Moviefone, DailyFinance, Patch and AOL Autos. AOL is targeting the online video advertising market going forward, with AOL On, its recently launched premium video platform. AOL is now also watching its profit margins closely, and increased its adjusted OIBDA (adjusted operating income before depreciation and amortization) outlook for 2012.

We expect AOL to focus only on its content and advertising businesses going forward while its dying subscription business continue to bring in declining amounts of revenue without spending much on it.

AOL competes in the online video advertising market with the likes of Google (NASDAQ:GOOG), Facebook, Microsoft (NASDAQ:MSFT) & Yahoo (NASDAQ:YHOO). Display ads on its own properties currently account for a third of AOL’s $16 Trefis price estimate, which stands nearly 30% below its market price.

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1. AOL’s CEO Discusses Q1 2012 Results – Earnings Call Transcript, SeekingAlpha [↩]