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AOL Reports Revenue Growth For The First Time In 8 Years In Q4 2012

AOL Inc. (NYSE: AOL) released fourth quarter 2012 results today.

“AOL returned to growth and generated significant value for shareholders in 2012,” said Tim Armstrong, Chairman and CEO. “AOL has strong momentum entering 2013 and is positioned to continue on our growth path by executing our strategy to build the next generation media and technology company.”

 
Summary Results In millions (except per share amounts)
           
Q4 2012   Q4 2011   Change FY 2012   FY 2011   Change
 
Revenue
Advertising $ 410.6 $ 363.8 13% $ 1,418.5 $ 1,314.2 8%
Global Display 169.8 170.6 0% 575.4 573.4 0%
Search   103.6   88.4 17%   371.5   357.1 4%
AOL Properties 273.4 259.0 6% 946.9 930.5 2%
Third Party Network 137.2 104.8 31% 471.6 383.7 23%
Subscription 174.2 194.6 -10% 705.3 803.2 -12%
Other   14.7   18.4 -20%   67.9   84.7 -20%
Total revenues $ 599.5 $ 576.8 4% $ 2,191.7 $ 2,202.1 0%
 
Adjusted operating income before depreciation and amortization (OIBDA) (1) $ 123.3 $ 133.1 -7% $ 412.6 $ 408.7 1%
 
Operating income $ 68.2 $ 54.8 24% $ 1,201.9 $ 45.8 NM
 
Net income attributable to AOL Inc. $ 35.7 $ 22.8 57% $ 1,048.4 $ 13.1 NM
 
Diluted EPS $ 0.41 $ 0.23 78% $ 11.21 $ 0.12 NM
 
Cash provided by operating activities $ 76.7 $ 99.6 -23% $ 365.6 $ 296.0 24%
 
Free Cash Flow (1)   $ 46.3   $ 72.6   -36%   $ 245.1   $ 164.7   49%

(1) See Page 10 for a reconciliation of Adjusted OIBDA and Free Cash Flow to the GAAP financial measures the Company considers most comparable.

KEY QUARTERLY TRENDS

Consolidated Revenue Trends:

  • Q4 revenue grew year-over-year for the first quarter in 8 years driven by global advertising revenue growth.
  • Global advertising revenue grew 13% year-over-year reflecting:
    • 31% growth in third party network revenue.
    • 17% growth in search revenue (formerly named “search & contextual”).
    • Flat global display revenue, with a 3% decline in domestic display revenue offset by continued growth in international display revenue.
  • Subscription revenue declined 10% year-over-year and monthly average churn was 1.8% in Q4 2012 compared to an 18% decline year-over-year in revenue and 2.2% monthly average churn in Q4 2011.

Consolidated Profitability Trends:

  • AOL amended its definition of Adjusted OIBDA in Q4 2012 to exclude significant special items that we do not believe are indicative of our core operating performance. These special items may positively or negatively skew analysis of our operating results in a given period. In 2012, these special items included income and expenses related to the patent transaction as well as expenses incurred related to the proxy contest.
  • Q4 2012 Adjusted OIBDA of $123.3 million excluded $13.3 million of special items including $7.1 million of patent sale and license costs, primarily related to a special year-end employee bonus related to the patent transaction, and costs associated with the acquisition of Buysight of $5.1 million. $11 million of these special items are recorded in cost of revenues and $2 million are recorded as general and administrative expenses.
  • Cost of revenues increased $29.9 million year-over-year driven by a 25%, or $20.8 million, increase in Traffic Acquisition Costs (TAC) related to 37% growth in AOL Networks (as described below) revenue and increased TAC related to our search marketing initiatives. Cost of revenue increases also reflect the impact of the special items discussed above and were partially offset by lower network related expenses.
  • General and administrative expenses grew $5.5 million in Q4 2012 versus the prior year period, which included an $8.5 million legal settlement. The increase in expenses year-over-year primarily reflects a $12 million increase in marketing expense related to the production of a number of brand campaigns across the business and brand portfolio domestically and internationally, some of which are expected to run in 2013.
  • Operating income grew year-over-year reflecting a $16.4 million increase to the original gain on the sale of our legacy access businesses in the UK and Germany, due to the release of a VAT indemnification reserve. The increase to the gain on sale had no impact on AOL’s cash flows as there was no payment made in connection with the release.

Asset, Cash & Cash Flow Trends:

  • In Q4 2012, AOL reduced its shares of common stock outstanding by an additional 14.4 million shares due to shares delivered by Barclays under the Accelerated Stock Repurchase agreement. At December 31, 2012, AOL had 76.6 million common shares outstanding, down 19% from December 31, 2011.
  • On December 14 th, AOL paid a special cash dividend of $5.15 per share to shareholders of record at the close of business on December 5 th, completing its commitment to return $1.1 billion to shareholders in 2012.
  • AOL had $466.6 million of cash and equivalents at December 31, 2012. Q4 cash provided by operating activities and Free Cash Flow were $76.7 million and $46.3 million, down year-over-year reflecting the timing of collections of receivables, increased marketing expenditures, acquisition related bonus and retention payments and the payment of a special year-end employee bonus as a result of the patent transaction.
  • AOL’s Board of Directors announced it authorized the Company to repurchase up to $100 million of its common stock from time-to-time over the course of the next twelve months depending on market conditions, stock price and other factors.

DISCUSSION OF SEGMENT RESULTS

In Q4 2012, AOL began to manage its business on a segmented basis, and therefore is presenting financial information for Q4 2012 and historical periods on the same basis as that reviewed by our management. Our segments are defined by the products and services they provide and by how we evaluate our business. The following are AOL’s reportable segments:

  • The Brand Group, which consists of the majority of AOL's portfolio of distinct and unique content and service brands. The results for this segment include advertising offerings on a number of owned and operated sites, such as AOL.com, the Huffington Post, Patch, TechCrunch and MapQuest.
  • The Membership Group, which consists of offerings that serve AOL’s registered account holders, both free and paid, and are focused on delivering world-class experiences to AOL’s loyal users who rely on these AOL products and properties every day. The results for this segment include AOL’s subscription offerings and advertising offerings on Membership Group properties, such as AOL Mail, as well as from performance compensation for marketing third party products and services.
  • AOL Networks, which consists of AOL's offerings to publishers and advertisers utilizing AOL’s Third Party Network as well as AOL Properties inventory sold by AOL Networks. The results for this segment include Advertising.com, ADTECH, Pictela, goviral and AOL On.

Additionally, AOL has a corporate and other category that includes activities that are not directly attributable or allocable to a specific segment. This category primarily consists of costs associated with broad corporate functions including legal, human resources, finance and accounting, and activities not directly attributable to a segment such as AOL Ventures, restructuring costs, tax settlements and other general business costs. In 2012, the corporate and other category also includes income from the sale and licensing of patents of $1,042 million (net of transaction costs) and patent and proxy contest expenses of $15.7 million and $8.9 million, respectively. In 2010, this category includes the $1,414.4 million goodwill impairment charge.

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