AOL Earnings Preview: What We Are Watching

AOL (NYSE:AOL) is set to release its Q2 2013 earnings Wednesday August 7. It sold off some non-core assets during the quarter in order to focus on its core content verticals and offer new services for its more promising businesses. ^[1] While this retooling will help AOL’s profits by eliminating non-core activities, it will also improve user engagement across properties by delivering more personalized content on fewer websites or services.

During the earnings call, we will watch for improvements in AOL’s display ads business, which makes up around 50% of its total value. We will specifically look at metrics like unique visitors and page views per visitor across AOL and third party properties as well as monitor the results of its search ads division, which has posted decent growth in the past few quarters. In addition, we will look for more color on the company’s social media strategy and programmatic advertising efforts going forward.

See our complete analysis for AOL here

Q1 Highlights

AOL’s stock declined by nearly 10% after the company announced its Q1 FY 13 results which failed to enthuse investors. AOL reported a 2% y-o-y gain in total revenue to $538.3 million. The total revenue growth was driven by growth across its advertising revenue lines. While the company reported 9% y-o-y growth in search and contextual advertising revenues, display ads revenues grew by 8%.

Video Ads Revenues In Focus

During Q2, AOL reported that it is redesigning its core properties AOL.com and AOL mail. We think this move is aimed at improving user engagement across AOL’s web properties and providing a more streamlined user experience. These changes are important as they will not only increase AOL’s unique visitor count but also boost the number of page views across AOL properties.

Both of these drivers are important because they directly impact AOL’s display ads division, which we estimate makes up around 50% of the company’s total value. If page views per user rise to around 20 by the end of our forecast period, it will result in around 10% upside to our price estimate.

Additionally, AOL is also aggressively developing its programmatic buying platform to sell its video ads more efficiently. This platform can bolster AOL’s revenues further by closely matching an advertiser’s ads with relevant video inventory. With relevant ads displayed across AOL’s video content, AOL can charge higher revenue per page view to an advertiser. In this earnings announcement, we are looking for more information on AOL’s programmatic buying platform as this can drive revenue and help AOL maintain its competitive advantage over companies such as Yahoo and Google.

Search Ads Revenues To Increase

According to our estimates, the search ads division constitutes ~10% of AOL’s value. Revenues from this division were around $372 million in 2012. During Q1 2013, AOL launched a new global search app which conducts search in 46 languages simultaneously. In this earnings announcement, we will closely watch for more traction in search ads revenue. We are also interested in the trend in click-through rates that determine revenue per search (RPS) for AOL. In Q1 2013, AOL was able to garner higher click-through rates and therefore higher RPS. Since revenue per search is one of the key drivers for this division, we are keen to know the additional steps that AOL has taken to increase its RPS. We currently forecast revenue per search to decline from $43 per 1000 searches in 2012 to $40 by the end of our forecast period.

Patch.com In Focus

Despite assurances from the management that patch.com will turn profitable in 2013, it continues to bleed money. If this property shows signs of improvement in Q2, it will augur well for AOL’s profits and provide some relief to investors. However, if the division continues to bleed money, AOL will need to retune its strategy. We will closely follow the management’s guidelines for patch.com in this earnings announcement.

We currently have a $27 price estimate for AOL, which is approximately 25% below the current market price.

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1. See AOL Sheds Music Assets To Focus On Core Content Business [↩]