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AOL Reports Revenue And Profit Growth In Q2

AOL Inc. (NYSE: AOL) released second quarter 2013 results today.

“AOL takes a major step forward today with another quarter of growth and our agreement to acquire the Adap.tv video marketplace platform that will make AOL a clear global leader in the most important growth segment in our industry – online video,” said Tim Armstrong, AOL Chairman and CEO. “AOL continued to get leaner during Q2 while growing consumer traffic, growing all advertising revenue lines, and improving our subscription trends.”
               
                       
Summary Results
In millions (except per share amounts)
 
Q2 2013     Q2 2012     Change
 
Revenue
Advertising $ 361.2 $ 337.8 7 %
Global Display 146.2 139.9 5 %
Global Search   93.7   86.5 8 %
AOL Properties 239.9 226.4 6 %
Third Party Network 121.3 111.4 9 %
Subscription 166.0 175.5 -5 %
Other   14.1   17.8 -21 %
Total revenues $ 541.3 $ 531.1 2 %
 
Adjusted operating income before depreciation and amortization (Adjusted OIBDA) (1) $ 108.3 $ 94.6 14 %
 
Operating income (2) $ 51.9 $ 1,059.2 -95 %
 
Net income attributable to AOL Inc. (2) $ 28.5 $ 970.8 -97 %
 
Diluted EPS $ 0.35 $ 10.17 -97 %
 
Cash provided by operating activities $ 89.4 $ 167.2 -47 %
 
Free Cash Flow (1) (2)         $ 57.3     $ 136.8     -58 %
 

(1)

See Page 9 for a reconciliation of Adjusted OIBDA and Free Cash Flow to the GAAP financial measures we consider most comparable.

(2)

Year-over-year comparisons were impacted by the Q2 2012 patent transaction with Microsoft Corporation (“Microsoft”); which resulted in a Q2 2012 benefit of $1,042 million to operating income, $970 million to net income attributable to AOL Inc. and $96 million to free cash flow.
 
 

Adap.tv Brings to AOL:
  • The only complete global programmatic video stack for publishers and advertisers across all screens;
  • A unified yield management platform for advertisers and publishers for planning, targeting, ad-serving and measurement;
  • One of the fastest growing platforms on the internet, with global revenue growth in excess of 100% per year in each of the last three years;
  • Wide adoption by the largest global advertisers and publishers, including 83 out of the Ad Age 100 and 70 of the comScore 100;
  • A talented team which has driven innovation in the automation of global video advertising.

Q2 Consolidated AOL Revenue Trends:
  • Q2 total revenue grew 2% year-over-year driven by global advertising revenue growth.
  • Global advertising revenue grew 7% year-over-year reflecting:
    • 5% growth in global display revenue reflects 3% and 19% growth in domestic and international display revenue, respectively, driven by increased reserved impressions sold on AOL Properties.
    • 9% growth in Third Party Network revenue driven by growth in premium formats sold across the network where the number of publishers and advertisers continues to grow .
    • 8% growth in global search revenue driven primarily by an increase in revenue per search on AOL.com.
  • Subscription revenue declined 5% year-over-year and domestic AOL-brand access subscriber monthly average churn was 1.4% in Q2 2013 compared to a 13% decline year-over-year in subscription revenue and 1.7% monthly average churn in Q2 2012.

Q2 Consolidated AOL Profitability Trends:
  • AOL’s Q2 2012 operating income, net income and diluted EPS were favorably impacted by $1.04 billion, $970 million and $10.16, respectively resulting from its patent transaction with Microsoft. Excluding this impact, operating income, net income and diluted EPS grew significantly.
  • Adjusted OIBDA grew 14% year-over-year, driven by total revenue growth of 2% and declines in general and administrative expenses, partially offset by increased costs of revenue.
  • Cost of revenues increased $3.7 million year-over-year driven by a 17% increase in Traffic Acquisition Costs (TAC) resulting from growth in search marketing related expenses and 9% growth in Third Party Network revenue, largely offset by lower network related expenses and a decline in sales tax expense of $7.6 million related to a Virginia sales tax settlement in Q2 2012.
  • General and administrative expenses declined $31.2 million in Q2 2013 versus Q2 2012, due to a decline in legal and consulting fees, including the absence of patent and proxy related expenses and the reimbursement in Q2 2013 of legal expenses from prior periods related to an escrow settlement.

AOL Asset, Cash & Cash Flow Trends:
  • On July 1, 2013, AOL entered into a five-year $250 million senior secured revolving credit facility agreement with a syndicated bank lending group. The credit facility remains undrawn.
  • In Q2 2013, AOL repurchased 1.4 million shares of common stock at an average price of $35.63, or approximately $50 million in aggregate, leaving approximately $50 million on our previous authorization. On July 1, 2013, AOL’s Board of Directors authorized a $150 million share repurchase, bringing AOL’s remaining repurchase authorization to $200 million.
  • AOL had $483.4 million of cash and equivalents at June 30, 2013. Q2 cash provided by operating activities and Free Cash Flow were $89.4 million and $57.3 million, respectively, down year-over-year due to the $96 million benefit in Q2 2012 related to the licensing of patents to Microsoft. The Q2 2013 Free Cash Flow comparison to the prior year was also negatively impacted by the early receipt in Q1 2013 of a prepayment from a large partner that was received last year during Q2.
                       
 

DISCUSSION OF SEGMENT RESULTS
                     
Q2'13         Q2'12         Change
(In millions)
Revenue
Brand Group 190.3 173.5 10 %
Membership Group 213.8 227.8 -6 %
AOL Networks 160.4 153.4 5 %
Corporate & Other 0.3 0.3 0 %
Intersegment eliminations   (23.5 )           (23.9 )         2 %
Total Revenue $ 541.3           $ 531.1           2 %
 
Adjusted OIBDA
Brand Group (1.4 ) (15.2 ) 91 %
Membership Group 151.6 158.3 -4 %
AOL Networks (11.3 ) (0.3 ) NM
Corporate & Other   (30.6 )           (48.2 )         37 %
Total Adjusted OIBDA $ 108.3           $ 94.6           14 %
 
 

Brand Group

Brand Group revenue growth reflects continued growth in global display and search revenue. Brand Group display revenue grew 9% globally driven by an increase in Brand Group inventory sold on a reserved basis. Brand Group search revenue grew 12% year-over-year driven primarily by revenue per search growth on AOL.com.

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