AOL Earnings Preview: Programmatic Platform To Deliver Growth Yet Again

AOL (NYSE:AOL) is set to release its Q4 2014 earnings Wednesday, February 11th. While the company posted 18% year-over-year growth in total revenues for the September quarter to $626.8 million, its net income was flat sequentially at $28 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. We expect this trend to continue in Q4, boosted as well by the recent acquisition of Vidible Inc, which will be consolidated into AOl’s earnings. Additionally, company’s search and contextual advertising business witnessed a growth in revenue during Q3, primarily due to its marketing efforts. We expect the company to report a marginal improvement in revenues in Q4 as well. We also anticipate a modest growth in display ads revenues in Q4, despite the overhang of shuttered sites (announced recently), which will impact growth in the coming quarters. 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

Real-time Bidding Revenue Growth in Focus

According to our estimates, the third-party display ads division constitutes over 41% 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 Q3 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. ^[1]

Search Ads Revenue Under the Scanner

According to our estimates, the search ads division constitutes 18% of AOL’s value. Search across AOL is powered by Google, which reported improvement in ad volume for its Q4 FY14 results on the back of better monetization of mobile search queries. AOL’s search ad revenues grew in Q3 FY14 due to a good showing from the enhanced campaigns program launched by Google in Q3 FY13. 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 Q4 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 availability of wide spectrum of content across its properties.

Display Ads To Stabilize

According to our estimates, the display ad division constitutes approximately 28% 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 Q3, the revenues for this division were flat at $145 million. The global display revenues were flat primarily due to disposed or de-emphasized brands, including Patch. However, we expect display revenues, excluding revenues from shuttered sites, to grow marginally in Q3. We believe that much of the improvement would be due to growth in the sale of premium formats across AOL’s properties and the use of the RTB platform, which will help the company to sell its unsold inventory. We expect this trend to continue in Q4 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.

We currently have a $41.97 price estimate for AOL, which is 3% below the current stock price.

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1. comScore Releases December 2014 U.S. Desktop Online Video Rankings, January 27 2014, www.comscore.com [↩]