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AOL Accelerates Revenue And Adjusted OIBDA Growth In Q3

Corporate & Other

Corporate & Other Adjusted OIBDA improved significantly year-over-year, primarily driven by declines in marketing and personnel costs as a result of our broader cost reduction efforts. Corporate & Other Adjusted OIBDA for Q3 includes expenses associated with completing the acquisition of Adap.tv.

Tax

AOL had Q3 2013 pre-tax income of $14.6 million and income tax expense of $13.1 million, resulting in an effective tax rate of 89.7%. This compares to an effective tax rate of 54.1% for Q3 2012. The effective tax rate for Q3 2013 differed from the statutory U.S. federal income tax rate of 35.0% primarily due to the tax impact of the non-deductible goodwill impairment charge, the foreign losses that did not produce a tax benefit and the size of these items relative to our pre-tax income. The effective tax rate for Q3 2012 differed from the statutory U.S. federal income tax rate due to foreign losses that did not produce a tax benefit.

Cash Flow

Q3 2013 cash provided by operating activities was $98.9 million, while Free Cash Flow was $64.6 million, both down slightly year-over-year primarily due to payments related to restructuring charges during the quarter. Free Cash Flow was further impacted by higher capital expenditures and higher capitalized product development costs versus the prior year period.

   

CONSOLIDATED OPERATING METRICS

                                     
                                       

 

Q3 2013         Q3 2012         Y/Y Change         Q2 2013       Q/Q Change
 
Subscriber Information
Domestic AOL-brand access subscribers (in thousands) (1)   2,508   2,893 -13 %   2,583 -3 %
ARPU (1) $ 20.15 $ 18.47 9 % $ 20.03 1 %
Domestic AOL-brand access subscriber monthly average churn (2) 1.4 % 1.8 % -22 % 1.4 % 0 %
 
Unique Visitors (in millions) (3)
 
Domestic average monthly unique visitors to AOL Properties 115 111 4 % 116 0 %
 
Domestic average monthly unique visitors to AOL Advertising Network 196 186 5 % 188 4 %
 
(1)   Domestic AOL-brand access subscribers include subscribers participating in introductory free-trial periods and subscribers that are paying no monthly fees or reduced monthly fees through member service and retention programs. Individuals who are only registered for our free offerings, including subscribers who have migrated from paid subscription plans, are not included in the AOL-brand access subscriber numbers presented above. ARPU is calculated as domestic average monthly access subscription revenue per AOL-brand access subscriber.
(2) Churn represents the percentage of subscribers that are either terminated or cancel our services, factoring in new and reactivated subscribers. Monthly average churn is calculated as the monthly average number of terminations plus cancellations divided by the initial subscriber base plus any new registrations and reactivations for the applicable period.
(3) See “Unique Visitor Metrics” on page 10 of this press release.

Webcast and Conference Call Information

AOL Inc. will host a conference call to discuss third quarter 2013 financial results on Tuesday, November 5, 2013, at 8:00 am ET. To access the call, parties in the United States and Canada should call toll-free (866) 825.1709 and other international parties should call (617) 213.8060. Additionally, a live webcast of the conference call, together with supplemental financial information, can be accessed through the Company's Investor Relations website at http://ir.aol.com . In addition, an archive of the webcast can be accessed through the link above for one year following the conference call, and an audio replay of the call will be available for two weeks following the conference call by calling (888) 286.8010 and other international parties should call (617) 801.6888. The access code for the replay is 14225057.

                                     
AOL Inc.
Consolidated Statements of Operations
(Unaudited; in millions, except per share amounts)
 
Three Months Ended September 30, Nine Months Ended September 30,
2013       2012 2013       2012
 
Revenues:
Advertising $ 386.0 $ 340.0 $ 1,106.4 $ 1,007.9
Subscription 161.6 173.5 493.4 531.1
Other     13.7       18.2       41.1       53.2  
Total revenues 561.3 531.7 1,640.9 1,592.2
Costs of revenues 418.6 382.3 1,211.6 1,163.1
General and administrative 78.2 97.2 237.6 301.2
Amortization of intangible assets 11.1 9.0 29.7 28.6
Restructuring costs 19.0 0.4 28.1 7.7
Goodwill impairment charge 17.5 17.5
Income from licensing of intellectual property (96.0 )
(Gain) loss on disposal of assets, net     0.2       (0.3 )     (2.1 )     (946.1 )
Operating income 16.7 43.1 118.5 1,133.7
Other income (loss), net     (2.1 )     2.0       (5.6 )     9.3  
Income from operations before income taxes 14.6 45.1 112.9 1,143.0
Income tax provision     13.1       24.4       57.8       130.7  
Net income $ 1.5 $ 20.7 $ 55.1 $ 1,012.3
Net (income) loss attributable to noncontrolling interests     0.5       0.1       1.3       0.4  
Net income attributable to AOL Inc. $   2.0   $   20.8   $   56.4   $   1,012.7  
 
Per share information attributable to AOL Inc. common stockholders:
 
Basic net income per common share $   0.03   $   0.22   $   0.73   $   10.82  
 
Diluted net income per common share $   0.02   $   0.22   $   0.69   $   10.64  
 
Shares used in computing basic income per common share     77.3       92.6       77.1       93.6  
 
Shares used in computing diluted income per common share     81.2       96.0       81.4       95.2  
 
Cash dividends declared per common share $   -   $   5.15   $   -   $   5.15  
                                                     
Depreciation expense by function:
Costs of revenues $ 29.8 $ 31.7 $ 90.1 $ 96.2
General and administrative     2.2       2.6       7.3       9.4  
Total depreciation expense $   32.0   $   34.3   $   97.4   $   105.6  
 
Equity-based compensation by function:
Costs of revenues $ 7.6 $ 5.0 $ 18.8 $ 13.6
General and administrative     4.2       6.1       12.6       14.7  
Total equity-based compensation $   11.8   $   11.1   $   31.4   $   28.3  
 
 
Traffic Acquisition Costs (included in costs of revenues) $   114.0   $   89.6   $   307.9   $   252.8  
 
Third Party Network Traffic Acquisition Costs $   93.8   $   77.1   $   248.9   $   221.1  
 
                                                   
 
                 
AOL Inc.
Consolidated Balance Sheets
(In millions, except per share amounts)
 
September 30, December 31,
2013 2012
Assets (unaudited)
 
Current assets:
Cash and equivalents $ 168.2 $ 466.6
Accounts receivable, net of allowances of $7.8 and $6.6, respectively 385.9 351.9
Prepaid expenses and other current assets 30.8 28.5
Deferred income taxes, net   47.2   40.6
Total current assets 632.1 887.6
Property and equipment, net 454.6 478.3
Goodwill 1,360.0 1,084.1
Intangible assets, net 221.7 133.2
Long-term deferred income taxes, net 113.6 148.8
Other long-term assets   75.3   65.3
Total assets $ 2,857.3 $ 2,797.3
 
Liabilities, Redeemable Noncontrolling Interest and Equity
Current liabilities:
Accounts payable $ 109.2 $ 76.1
Accrued compensation and benefits 96.2 151.4
Accrued expenses and other current liabilities 154.7 175.3
Deferred revenue 68.9 57.8
Current portion of obligations under capital leases   52.3   49.6
Total current liabilities 481.3 510.2
Long-term portion of obligations under capital leases 42.7 56.3
Long-term deferred income taxes 4.6 5.8
Other long-term liabilities   84.8   73.8
Total liabilities   613.4   646.1
 
Redeemable noncontrolling interest 10.2 13.4
Equity:

Common stock, $0.01 par value, 111.9 million shares issued and 77.9 million

 

shares outstanding as of September 30, 2013 and 110.1 million shares issued

and 76.6 million shares outstanding as of December 31, 2012 1.1 1.1
Additional paid-in capital 3,568.6 3,457.5
Accumulated other comprehensive income (loss), net (297.0) (294.1)
Accumulated deficit (129.6) (188.0)
Treasury stock, at cost, 34.0 million shares at September 30, 2013 and
33.5 million shares at December 31, 2012   (910.3)   (838.4)
Total stockholders' equity 2,232.8 2,138.1
Noncontrolling interest   0.9   (0.3)
Total equity   2,233.7   2,137.8
Total liabilities, redeemable noncontrolling interest and equity $ 2,857.3 $ 2,797.3
 
   
AOL Inc.
Consolidated Statements of Cash Flows
(Unaudited; in millions)
               
Nine Months Ended September 30,
2013 2012
 
Operating Activities
 
Net income $ 55.1 $ 1,012.3
Adjustments for non-cash and non-operating items:
Depreciation and amortization 127.1 134.2
Asset impairments and write-offs 30.4 3.0
(Gain) loss on step acquisition and disposal of assets, net (1.1) (958.7)
Equity-based compensation 31.4 28.3
Deferred income taxes 31.5 103.0
Other non-cash adjustments 4.5 (3.2)
Changes in operating assets and liabilities, net of acquisitions (50.0) (30.0)
       
Cash provided by operating activities 228.9 288.9
 
Investing Activities
 
Investments and acquisitions, net of cash acquired (336.9) (10.3)
Proceeds from disposal of assets, net 1.1 951.5
Capital expenditures and product development costs (52.7) (49.0)
       
Cash (used) provided by investing activities (388.5) 892.2
 
Financing Activities
 
Repurchase of common stock (102.2) (698.7)
Principal payments on capital leases (44.5) (41.1)
Tax withholdings related to net share settlements of restricted stock units (13.3) (6.3)
Proceeds from exercise of stock options 22.7 26.1
Other financing activities

0.8

0.3
       
Cash used by financing activities (136.5) (719.7)
 
Effect of exchange rate changes on cash and equivalents (2.3) (1.8)
 
(Decrease) increase in cash and equivalents (298.4) 459.6
 
Cash and equivalents at beginning of period   466.6   407.5
 
Cash and equivalents at end of period $ 168.2 $ 867.1
 
 
SUPPLEMENTAL INFORMATION – UNAUDITED

Items impacting comparability: The following table represents certain items that impacted the comparability of net income attributable to AOL Inc. for the three and nine months ended September 30, 2013 and 2012 (In millions, except per share amounts):

     
         

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

2013         2012     2013         2012
       
Restructuring costs $ (19.0) $ (0.4) $ (28.1) $ (7.7)
Equity-based compensation expense (11.8) (11.1) (31.4) (28.3)
Asset impairments and write-offs (29.0) (0.2) (30.4) (3.0)
Gain (loss) on disposal of assets, net (0.2) 0.2 2.1 946.6
Costs related to proxy contest (8.8)
Costs related to patent sale and return of proceeds to shareholders (3.0) (8.6)
Income from licensing of intellectual property 96.0
Tax, legal and other settlements (7.6)
Gain on consolidation of Ad.com Japan (1)                 10.8
Pre-tax impact     (60.0)     (14.5)     (87.8)     989.4
 
Income tax impact (2)     16.7     4.6     26.9     (49.7)
After-tax impact of items impacting comparability of net income $   (43.3) $   (9.9) $   (60.9) $   939.7
 
Impact per basic common share $   (0.56) $   (0.11) $   (0.79) $   10.04
 
Impact per diluted common share $   (0.53) $   (0.10) $   (0.75) $   9.87
 
Effective tax rate (3) 39.5% 39.2% 39.5% 39.2%
 
(1)   During the three months ended March 31, 2012, AOL purchased an additional interest in a joint venture, Ad.com Japan, and gained control of the board and day-to-day operations of the joint venture. As a result, beginning in February 2012, AOL consolidated the results of Ad.com Japan and upon closing of the transaction, AOL recorded a noncash gain of approximately $10.8 million related to our pre-existing investment in Ad.com Japan.
(2) The income tax impacts for certain items such as gain (loss) on disposal of assets and gain on consolidation of Ad.com Japan are calculated by using the actual tax expense for the transactions. The goodwill impairment charge of $17.5 million recorded in 2013 is not deductible for income tax purposes. The income tax impact for all remaining items is calculated by applying the normalized effective tax rate to deductible items.
(3) For the three and nine months ended September 30, 2013, the effective tax rate was calculated based on AOL's 2013 projected normalized annual effective tax rate. The effective tax rate for the three and nine months ended September 30, 2012 was calculated based upon AOL's 2012 normalized annual effective tax rate.
 
                     
AOL Inc.
Reconciliation of Adjusted OIBDA to Operating Income and Free Cash Flow to Cash Provided by Operating Activities
(In millions)
 

Three Months Ended September 30,

Nine Months Ended September 30,
2013 2012 2013 2012
 
Operating income $ 16.7 $ 43.1 $ 118.5 $ 1,133.7
 
Add: Depreciation 32.0 34.3 97.4 105.6
 
Add: Amortization of intangible assets 11.1 9.0 29.7 28.6
 
Add: Restructuring costs 19.0 0.4 28.1 7.7
 
Add: Equity-based compensation 11.8 11.1 31.4 28.3
 
Add: Asset impairments and write-offs 29.0 0.2 30.4 3.0
 
Add: Losses/(gains) on disposal of assets, net 0.2 (0.2) (2.1) (946.6)
 
Add: Special items (1) - 3.0 - (71.0)
               
Adjusted OIBDA $ 119.8 $ 100.9 $ 333.4 $ 289.3
 
 
Cash provided by operating activities $ 98.9 $ 101.8 $ 228.9 $ 288.9
 
Less: Capital expenditures and product development costs 19.7 17.3 52.7 49.0
 
Less: Principal payments on capital leases 14.6 13.0 44.5 41.1
               
Free Cash Flow $ 64.6 $ 71.5 $ 131.7 $ 198.8
 
(1)   Special items for the nine months ended September 30, 2012 include patent licensing income of $96.0 million, partially offset by costs related to the proxy contest of $8.8 million, costs related the patent sale and return of the related proceeds to shareholders of $8.6 million, and $7.6 million related to a tax settlement.

Note Regarding Non-GAAP Financial Measures

This press release and its attachments include the financial measures Adjusted OIBDA and Free Cash Flow, both of which are defined as non-GAAP financial measures by the Securities and Exchange Commission (SEC). These measures may be different than similarly-titled non-GAAP financial measures used by other companies. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with generally accepted accounting principles (GAAP). Explanations of our non-GAAP financial measures are as follows:

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