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AOL Reports Q3 Earnings

AOL Inc. (NYSE: AOL) released third quarter 2012 results today. “We just reported the best relative revenue performance in seven years and the second consecutive quarter of year-over-year profit growth, exceeding our expectations,” said Tim Armstrong, Chairman and CEO. “We have positioned AOL for growth in 2013 and beyond with consumer and advertiser demand growing for our premium content and innovative products, video, services and ad formats.”

 
Summary Results
In millions (except per share amounts)
                 
Q3 2012     Q3 2011     Change
 
Revenue

Advertising

$ 340.0 $ 317.7 7%

Subscription

173.5 191.9 -10%

Other

  18.2   22.1 -18%
Total revenues $ 531.7 $ 531.7 0%
 
Adjusted operating income before depreciation and amortization (OIBDA) (1) $ 97.9 $ 87.2 12%
 
Restructuring costs $ 0.4 $ 7.1 -94%
 
Operating income $ 43.1 $ 8.6 401%
 
Net income (loss) attributable to AOL Inc. $ 20.8 $ (2.6) NM
 
Diluted EPS $ 0.22 $ (0.02) NM
 
Cash provided by operating activities $ 101.8 $ 82.5 23%
 
Free Cash Flow (1) $ 71.5 $ 56.4 27%
                         

(1) See Page 9 for a reconciliation of Adjusted OIBDA and Free Cash Flow to the GAAP financial measures the Company considers most comparable.

 

KEY QUARTERLY TRENDS

Revenue Trends:

  • AOL’s total revenue was flat year-over-year, representing AOL’s best revenue performance in over 7 years.
  • Global Advertising revenue grew 7%, its sixth consecutive quarter of year-over-year growth, reflecting:
    • 7% year-over-year growth in combined AOL Properties Display and Third Party Network revenue, which totaled $248.2 million for the quarter.
    • 18% growth in Third Party Network revenue, its sixth consecutive quarter of year-over-year growth.
    • 8% year-over-year growth in Search and Contextual revenue, representing AOL’s first quarter of year-over-year growth in over 3 years, driven primarily by continued double-digit growth in search revenue on AOL.com.
  • Subscription trends continued to improve meaningfully with a 10% decline in revenue year-over-year and 1.8% monthly average churn compared to a 22% decline year-over-year in revenue and 2.2% monthly average churn in Q3 2011.

Profitability Trends:

  • AOL grew Adjusted OIBDA 12% year-over-year, the second consecutive quarter of year-over-year growth.
  • AOL reduced Adjusted OIBDA expenses excluding Traffic Acquisition Costs (TAC) and one-time items sequentially for the fifth consecutive quarter. Additionally, these expenses declined $26.6 million, or 7% year-over-year in Q3 2012.

Product/Consumer Trends:

  • AOL continued to make progress in key internet growth areas:
    • Video: The AOL On Network grew rapidly in both usage and revenue in Q3 2012, rising to the 2 nd largest video network by views per comScore and growing revenue at double-digit rates both year-over-year and quarter-over-quarter in Q3 2012.
    • Brand Advertising: Increased advertiser adoption of AOL premium formats contributed to higher year-over-year reserved inventory pricing with the number of advertisers purchasing Project Devil ads continuing to grow at double-digit rates year-over-year and advertiser repeat usage of Devil remaining very strong.
    • Advertising.com: The number of publishers joining the Advertising.com network and the number of impressions available for sale to advertisers continued to grow at double-digit rates, while the number of video impressions sold grew over 100% from Q3 2011.
    • Local: Patch grew its traffic 19% year-over-year in September to 11.9 million unique visitors per comScore and frequency of visits grew both quarter-over-quarter and year-over-year.
    • Traffic: Unique visitors to AOL Properties in Q3 2012 were 111 million, growing 4% year-over-year.

Asset, Cash & Cash Flow Trends:

  • On August 3 rd, AOL announced the expiration of its modified "Dutch Auction" tender offer and the repurchase of approximately 300,000 shares of AOL's common stock at $30.00 per share.
  • On August 27 th, AOL announced its method of returning $1.1 billion, or 100% of the patent transaction proceeds, to shareholders through a fixed dollar collared Accelerated Stock Repurchase (ASR) agreement with Barclays Bank PLC. (Barclays) and the authorization of a $5.15 per share special, one-time, cash dividend.
  • In addition to the approximately 300,000 shares acquired from the Dutch Auction, AOL has reduced its shares outstanding by a further 10.5 million shares as of today, based on shares delivered by Barclays under the ASR agreement. AOL expects to receive approximately 8 million additional shares by December 31, 2012, at which time AOL’s shares outstanding should be approximately 77 million shares. This represents an approximate 30% reduction in AOL’s shares outstanding from a high of approximately 107 million shares in 2011.
  • AOL had approximately $867 million of cash and equivalents at September 30, 2012. Q3 cash provided by operating activities and Free Cash Flow were $101.8 million and $71.5 million, up 23% and 27% year-over-year, reflecting growth in operating income.
                             

DISCUSSION OF RESULTS

Revenue

 

Revenue Summary

             
Q3 2012     Q3 2011     Change
(In millions)
Advertising revenue

Display

$ 135.4 $ 136.7 -1%              

Display - domestic

122.5 125.8 -3% Q3 2012     Q3 2011     Change

Display - international

12.9 10.9 18%

Search and contextual

  91.8       85.1 8% AOL Properties Display $ 135.4 $ 136.7 -1%

AOL Properties

227.2 221.8 2% Third Party Network 112.8 95.9 18%
 

Third Party Network

  112.8       95.9 18% AOL Properties Display &    
Total advertising revenue 340.0 317.7 7% Third Party Network $ 248.2 $ 232.6 7%
 
Subscription revenue 173.5 191.9 -10%
 
Other revenue   18.2       22.1 -18%
 
Total revenue $ 531.7     $ 531.7 0%
 

Total revenue was flat year-over-year, representing AOL’s best year-over-year revenue performance in 7 years. Global advertising revenue grew 7% year-over-year in Q3 2012, reflecting continued double-digit growth in Third Party Network revenue, growth in Search and Contextual revenue for the first time in over 3 years and double-digit growth in international display revenue, partially offset by a decline in domestic display revenue.

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