Advertising Growth Lifts AOL’s Results

AOL (NASDAQ:AOL) declared its Q2 2013 results on August 7^th. The company reported 2% y-o-y growth in total revenue to $541.3 million. The higher revenue was driven by growth across its advertising revenue lines. While the company reported 8% y-o-y growth in search and contextual advertising revenues for the quarter, display ads revenues grew by 5% y-o-y. These two divisions are important since they contribute ~45% to AOL’s estimated value. Additionally, AOL’s revenues from third party network also grew by 9% to $121 million. Moreover, subscription revenues declined by 5% y-o-y to $166 million, at a slower pace compared to 13% decline in Q2 2012. AOL also signaled its plan to pull back on its Patch local news operations and exit certain Patch sites.

In our pre earnings article, we had stated that we are closely following AOL’s programmatic advertising platform for any new development as it is a key growth driver for AOL going ahead. ^[1] During the earnings call, AOL announced that is acquiring Adap.tv for $405 million to strengthen its programmatic video ads platform.

See our complete analysis for AOL here

Display Ads Revenues Continue To Grow

According to our estimates, the display ads division constitutes approximately just over 25% of AOL’s value. The key drivers for this division are unique visitor count, revenue per page view (RPM) and page view per unique visitor. The company reported 5% y-o-y growth in display ads revenues to $146.2 million during the quarter.

During Q2, AOL focused on improving user engagement by offering premium video content across its properties. It signed new premium content providers such as Fortune, CNNMoney, People etc during the quarter. The improvement in video offerings translated into overall growth in display ads metrics. While the number of unique visitors across AOL properties grew by 3% y-o-y to 116 million, AOL also reported improvements in page views.

Adapt.TV To Bolster Programmatic platform

AOL is aggressively developing its programmatic buying platform to sell its video ads more efficiently. During the earnings call, AOL announced that it is acquiring Adapt.tv for $405 million. Adap.tv’s platform lets publishers and advertisers trade video advertising space in real time through programmatic buying. We believe that this acquisition will augur well for AOL as it can now sell advertising against its premium video content.

During Q2, AOL’s programmatic platform was one of the primary contributor to the growth in display ads revenues. AOL reported growth in the number of ads sold through programmatic platform. Additionally, programmatic platform also lifted the RPM for AOL. We believe that a strong programmatic platform will be a key growth driver as it can bolster AOL’s revenues further by closely matching an advertiser’s ads with relevant content inventory. With relevant ads displayed across AOL’s video content, AOL can continue to charge higher revenue per page view (RPM) to an advertiser. Currently, we expect revenue per page view to grow from $2.96 to $3.50 by the end of our forecast period. However, if RPM were to increase to $4.50 by the end of our forecast period, our price estimate can increase by 5%.

Marketing Efforts Lifts Search Ads Revenues

According to our estimates, the search ads division constitutes ~15% of AOL’s value. While revenues from this division grew by 8% y-o-y to $94 million, traffic acquisition cost increased by 17% due to higher search marketing expense. This quarter marks four consecutive quarters of year-over-year global search. In Q2, AOL was able to garner higher click-through rates and therefore higher RPS. Search remains a growth area for AOL, and we expect AOL to report higher revenues from this division going ahead.

Cost Cutting Measures Boosts Profitability

Although AOL’s overall revenue increased by 2% y-o-y, it reported a 200 basis points improvement in operating income before depreciation and amortization (OIBDA) margins from 17.8% in Q2 2012 to 20% in Q2 2013. OBIDA increased to $108.3 million from $94.6 million in the same last year, primarily due to lower G&A expense in the quarter. AOL stated that it will focus on eliminating non-core activities in the coming quarters, and we expect this will lead to a further reduction in corporate expenses. It has increased its OBIDA guidance to $435 million for 2013.

We currently updating our AOL model. At present, we have a $27 price estimate for AOL, which is approximately 25% below the current market price.

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1. See AOL Earnings Preview: What We Are Watching [↩]