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TheStreet Open House

AOL’s Programmatic Play Pushes Second-Quarter Growth

NEW YORK (TheStreet) -- AOL's (AOL) big bet on programmatic advertising is paying off. The company's second-quarter earnings report, released Wednesday, was further proof of the division's critical importance to AOL's future growth.

Over the quarter, the Internet media company posted its sixth consecutive quarter of top-line and operating income growth, driven by a pick-up in video and programmatic advertising sales to rival Google  (GOOGL) and Yahoo!'s (YHOO) separate digital ads solutions.

Over the three months ended in June, the New York-based company reported business in its programmatic division (that is, its platforms which facilitate automatic and real-time ad-buying) up 100% year over year, while the division grew to account for 35% of segment revenue, up from 5% a year earlier.

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Global advertising revenue climbed 20%, in large part due to AOL's programmatic solutions as well as increased ad pricing and an uptick in video advertising.

"It's one of the largest industry shifts in the last 20 years," said CEO Tim Armstrong on a post-earnings conference call. "Advertisers aren't saying they want to spend less, they want better ROI, and better targeting. And we've done an exceptional job [providing that]."

Chief Financial Officer Karen Dykstra added that the company has succeeded through identifying underlying strength in video and programmatic advertising, allocating increased investment to expand its footprint in recent years. "We're investing with discipline in our products, people and technology," she said on the call.

However, increased investments have put pressure on gross margins for some time. Gross margins in the second quarter of 26.39% were little changed from a year earlier and remain comparatively weak against Yahoo!'s 74.79% and Google's 62.31% in their respective recent quarters. Dykstra said she expects margin improvement in the fourth quarter during a seasonally strong period.

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The soft launch of the first iteration of One by AOL, a cross-platform real-time bidding digital ads solution, was a key feature in AOL's concerted push to invest and grow programmatic presence. Last week, the company announced its second charter multibillion-dollar customer, French advertising company Havas, which has signed on to use the platform across 100 countries.

"It's further validation of a big bet we've been making over the last two years in pulling together our different programmatic assets under the One by AOL umbrella and we're starting to see clients who are really excited and believe that this is transformative for their business," One by AOL CEO Toby Gabriner told TheStreet upon the announcement.

While One by AOL is operational with several key customers already using the service, the platform's complete analytical and ad-buying functionality will launch in 2015.

Read More: Microsoft Is Using Bing as a Trojan Horse to Rival Google

AOL's second-quarter success helped to push top- and bottom-line growth above analysts' expectations. The company recorded adjusted net income $37.3 million, or 45 cents a share, flat from a year earlier but slightly higher than Thomson Reuters estimates of $35.3 million, or 44 cents a share.

Revenue climbed 12% year over year to $606.8 million, exceeding forecasts of $595.51 million. By segment, search advertising moved 6% higher to $98.9 million, while third-party platform sales accelerated 60% to $194.3 million thanks to AOL's inclusion of Adap.tv (a company it completed acquisition of last September) and a push toward premium-priced formats such as video.

"We believe AOL continues to make incremental progress on its long-term strategy of reigniting top-line growth and improving profitability, and this past quarter's performance was further proof of that," Cantor Fitzgerald analysts wrote in a research report. The firm maintains a "hold" rating and $47 price target on AOL shares.

In morning trading Wednesday, AOL shares were up 3.7% to $40.43.

-- Written by Keris Alison Lahiff in New York.

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