AOL Earnings: Programmatic Buying Boosts Revenues To Decade-High Levels


AOL ( AOL ) reported its Q4 2013 and full-year results on February 6. It posted 13% year-over-year growth in total revenues for the quarter to $679 million as revenues from its display ads segment grew. While AOL saw 2% decline in search and contextual advertising revenues for the quarter, display ads revenues grew by 7%. Furthermore, its third-party display ads division grew by 63% year over year. However, core subscription revenues continued to decline as revenues fell by 10% year over year to $156.7 million.

In our pre-earnings note , we had stated that we will be closely following AOL's programmatic advertising platform for revenue growth and that it will be a key growth driver for AOL going ahead. As expected, much of the revenue growth for AOL came from the increasing use of its programmatic platform across the third-party network. Additionally, improvement in premium format impressions and CPMs also buoyed display ads revenues across its properties.

See our complete analysis of AOL here

Programmatic Platform Boosts Third-Party Display Ads Revenues

According to our estimates, the third-party display ads division constitutes over 30% of AOL's value. In the fourth quarter, revenues from third-party display ads grew by 63% to $223.6 million, driven by growth in the sale of premium formats across AOL's programmatic platform, and by the inclusion of revenue from Third-Party Network Revenue grew 20% excluding

AOL is aggressively developing its programmatic ads platform to sell more ads on third-party sites. The company not only reported growth in the number of ads sold through the programmatic platform, but also an increase in revenue per page view. The company served 4.3 billion video ads in December, setting a new industry record and making it number one in video ads served for the third consecutive month. Furthermore, its DSP, SSP and reported triple-digit growth during the quarter.

We believe that a strong programmatic platform will be a key driver in boosting AOL's revenues by closely matching an advertiser's ads with relevant content inventory. An RTB (real-time bidding) or programmatic platform is a method of selling and buying online display ads in real time. RTB aggregates the impression slots offered across multiple ad networks and matches them (based on the advertisers target, budget and placement requirements) with the most appropriate ads. With relevant ads displayed across content, AOL can continue to charge higher revenue per page view ( RPM ) to advertisers. Currently, we expect revenue per page view to grow from $3.90 to $5.00 by the end of our forecast period. However, if RPM were to increase to $6 by the end of our forecast period, our price estimate would increase by 5%.

Premium Ads Sales Bolsters Display Ad Revenues

According to our estimates, the display ad division constitutes approximately 30% of AOL's value. The key drivers for this division are unique visitors count, revenue per page view ( RPM ) and page view per unique visitor. In line with our expectation, display ad revenues grew by 7% year over year to $141.9 million.

The primary reason for this growth was improved pricing related to growth in the sale of premium formats across AOL's properties. Premium format impressions and RPMs grew at double-digit pace year over year and quarter over quarter.

Furthermore, the improvement in content offerings translated into overall growth in the number of unique visitors across AOL properties, which grew 4% year over year to 120 million. As a result, AOL was able to serve more ads to its users during the quarter.   AOL continues to improve user engagement by offering premium content across its properties through its well known brands like ESPN etc. User engagement is important for AOL's overall financial health as it not only increases unique visitors count, but also drives page views and RPM across properties. We currently forecast that the RPM on AOL properties will increase from $3.00 to $3.40 by the end our forecast period.

Search Ads Division Falters

According to our estimates, the search ads division constitutes ~19% of AOL's value. Search across AOL is powered by Google. During the quarter, revenues from this division declined by 2% to $101 million. The decline was primarily due to fewer queries from AOL clients from international markets and a decline in the number of subscribers. However, the company plans to build sustainable search products in partnership with Google so that its search revenues are stable in 2014.

We currently have a $34 price estimate for AOL , which is approximately 30% below the current market price.

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September 17th, 2013 by Trefis Team

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AOL ( AOL ) started out as a big player in the dial-up Internet space but transitioned into a company that relies on content and ads to drive revenues, as subscribers shifted to broadband Internet services. AOL has adopted a barbell sales strategy that offers programmatic advertising on one end and deep marketing services or premium buys on the other. It is ramping up its real-time bidding platform (RTB) through in-house development and acquisition. Additionally, to address premium ads, AOL has launched a host of new ad formats to lure advertisers to its properties. In this article, we will look at AOL's ad strategy.

See our complete analysis of AOL here

Online Ad Sales Explained

Before the advent of programmatic buying, digital content publishers sold ads directly to advertisers through ad networks. The ad inventory listed by a publisher was matched to advertisers based on their target preferences (which includes demographics, geographic, contextual preferences etc) for a predefined fixed or static price. If an agreement between an ad publisher and advertiser was not reached, the network moved the inventory to the next advertiser in line. However, this mechanism is inefficient and often fails to match ad inventory with a prospective advertiser. As a result, publishers lose out on revenue and advertisers lose out on getting cheap ad placements.

Over the past few years publishers have been increasingly adopting ad-exchange mechanism that uses real-time bidding (RTB) platforms.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AOL , RPM , GOOG , MSFT , YHOO



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