AOL Earnings Preview: Revenue Growth In Focus
AOL (NYSE:AOL) is set to release its Q1 2015 earnings Friday, May 8th. The company posted 8% year-over-year growth in revenues to $562.2 million in Q4, while the net income grew by 66% year over year to $59.6 million. The company reported growth in revenues largely due to the prolific use of its real-time bidding platform that enables advertisers to successfully place video and display ads across third-party websites. However, the overhang of shuttered sites continued to affect its advertising business. We expect this trend continued in Q1. We thus expect the company to report a marginal improvement in revenues in Q1. We also anticipate a modest growth in display ads revenues in Q1, excluding the overhang of shuttered sites, which is expected to impact growth in the first half of the year. The growth in ad revenues will be driven by the content on AOL properties, and AOL has done well to sign new content deals for both its video and mobile offerings. We continue to closely monitor the number of new content deals the company has signed for its sites as they are instrumental in boosting pageviews, searches and ad revenues.
See our complete analysis of AOL here
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According to our estimates, the third-party display ads division constitutes over 42.2% of AOL’s value. In the previous quarter, the real-time bidding (RTB) platform propelled revenues for this division. The sale of video ads through adapt.tv, a RTB for video ads, was one of the primary contributors to revenue growth in 2014. We expect video ads to once again contribute heavily to third-party display ads revenue as AOL is consistently ranked among the top three properties for video ads in the U.S. 
Display Ads To Grow Albeit At A Slower Pace
According to our estimates, the display ad division constitutes approximately 25% of AOL’s value. The key drivers for this division are unique visitors count, revenue per page view (RPM) and page view per unique visitor. In Q4, the revenues for this division declined by 6%, primarily due to the absence of approximately $12 million in revenue from the disposed or shuttered brands. However, if the effect of shuttered site is negated then the display ads grew by 1%. We expect display revenues, excluding revenues from shuttered sites, to grow marginally in Q1. We believe that much of the improvement was due to growth in the sale of premium formats across AOL’s properties especially from the number of video ads sold on AOL’s brand properties such as Huffington Post, etc. We expect this trend to continue in Q1 as AOL will be able to serve more ads to its users during the quarter. With this earnings announcement, we will continue to closely monitor the performance metrics for this division to ascertain the role of new content.
Search Ads Revenue Under the Scanner
According to our estimates, the search ads division constitutes 19% of AOL’s value. Search across AOL is powered by Google, which reported improvement in ad volume for its FY14 results on the back of better monetization of mobile search queries. AOL’s search ad revenues grew in FY14 due to a good showing from the enhanced campaigns program launched by Google in FY13, and the marketing effort undertaken by the company to lure more advertisers. Furthermore, the growth was driven as well by an increase in queries from AOL clients; key here was the success of AOL’s increased investment in search marketing, which succeeded in engaging users. We expect this trend to continue in Q1 as the company plans to build sustainable search products in partnership with Google and improve content across its properties. As a result, during this earnings announcement, we expect its click-through rates and revenue per search (RPS) to improve due to the availability of wide spectrum of content across its properties.
We currently have a $42.41 price estimate for AOL, which is 4% above the current stock price.
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- comScore Releases March 2015 U.S. Desktop Online Video Rankings, April 22 2015, www.comscore.com [↩] [↩]