AOL (NASDAQ:AOL) reported its Q1 2015 results on May 8. The company posted 7% year-over-year growth in revenues to $625.1 million, while net income declined by 25% year-over-year to $7 million. As stated in our pre-earnings note, much of AOL’s revenue growth came from the growth of its programmatic platform across the third-party network. The third-party ads division grew by 19% year over year to $231.6 million. Furthermore, AOL reported 19% growth in search and contextual advertising as its marketing efforts bore fruit and revenue per search improved. However, its display ads revenues declined by 4%, primarily due to the absence of approximately $4 million in revenue from disposed or shuttered brands (including Patch) and a sales force reorganization that was initiated at the end of 2014. AOL’s core subscription revenues continued to decline as revenue fell by 6% to $141.6 million. While the company announced that it continues to realign its business, particularly its sales force, to conform to the needs of programmatic buying, markets reacted positively to topline growth from programmatic sales. In this note, we will analyze AOL’s quarterly results.
Programmatic Platform Boosts Third-Party Display Ads Revenues
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According to our estimates, the third-party display ads division constitutes over 42.2% of AOL’s value. In the first quarter, revenues from third-party display ads continued to generate strong growth. Revenues from this division grew by 19% to $231.6 million, driven by growth in the sale of premium ads, especially video ads across AOL’s programmatic platform. The massive shift to programmatic continued with programmatic revenue growing at 80% year over year, and it now represents 45% of global brand ad revenue. AOL platform’s overall revenue grew by 21% year over year and its ad pricing grew at double digits across both its owned and operated properties and publisher properties.
AOL’s platform is focusing on delivering ads not only across different platforms (such as tablets, mobiles and desktops) but also across different formats (i.e., videos, contextual search, etc). As a result, AOL’s mobile ad revenue was up 100% year over year and 56% of its customers are now running across screen or omni-channel campaign. We believe that a strong programmatic platform will be a key driver in boosting AOL’s revenues by closely matching an advertiser’s ads with relevant content inventory. RTB (real-time bidding) aggregates the impression slots offered across multiple ad networks and matches them (based on the advertisers’ targets, budget and placement requirements) with the most appropriate ads. Furthermore, with the cross screen platforms, ads served through programmatic platforms are shown over mobile devices, desktops and tablets. With relevant ads displayed across content, AOL can continue to charge higher revenue per page view (RPM) to advertisers. Currently, we expect revenue per page view to grow from $6.50 to $8.80 by the end of our forecast period in 2021.
Marketing Efforts Bolster Search Ad Revenues
According to our estimates, the search ads division constitutes ~19% of AOL’s value. Search across AOL is powered by Google. In line with our expectation, revenues from this division grew by 19% to $116.4 million during the quarter. Growth was primarily due to an increase in queries from AOL clients as AOL was able to engage them successfully. Furthermore, AOL stated that its search marketing efforts helped boost queries across its properties. As a result of these efforts, AOL’s revenue per search improved. As the company plans to build sustainable search products in partnership with Google, we expect that its search revenues will be stable for the remainder of 2015.
Multiplatform Offering To Offset A Decline In Display Ads
According to our estimates, the display ad division constitutes approximately 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. Display ad revenues declined by 4% to $130.5 million, primarily due to the absence of revenue from disposed or shuttered brands in 2013, including Patch. This overhang is expected to remain in the first half of 2015 as the company restructures its business by realigning its sales force.
The company was able to withstand price competition in the display ads industry primarily due to the increase in the number of video ads sold on AOL’s brand properties such as Huffington Post, etc. Furthermore, unique user count and revenue per ad impression related to videos also increased as company delivered both content and ads to mobile platforms.  The company was among the top 3 players in content videos and video viewers categories in Q1 2015. The improvement in video offerings translated into overall growth in the number of unique visitors across AOL properties, which grew to 190 million with almost 50% of traffic being mobile. This indicates that AOL was able to serve more display ads to its users through mobile devices during the quarter. This also indicates that AOL was able to engage users across both desktop and mobile devices. User engagement is important for AOL’s overall financial health as it not only increases the unique visitor count but also drives page views and RPM across properties. We currently forecast that the RPM on AOL properties will increase from $3.10 to $3.50 by the end our forecast period in 2021.
We are in the process of updating our AOL model. At present, we have a $42.41 price estimate for AOL, which is 3% below the current market price.Notes: