) Internet subscription business has been in a secular downtrend
for the past few years due to the advent of broadband Internet.
While the subscription business accounts for over 35% of the
company's revenues, it makes up nearly 95% of its adjusted
operating income before depreciation and amortization (OIBDA). The
company's subscription base has shrunk from over 25 million in 2002
to below 2.5 million in Q3 2013. However, our analysis indicates
that the current subscriber base is of high quality based on the
the customer lifetime value (
) metrics. In this article we will review AOL's subscription
business and how it can aid revenue growth in the future.
See our complete analysis for AOL here
Improvement in Quality Of AOL's Subscriber Base
AOL introduced a simplified pricing structure for its
subscription services in 2011. As a result, subscription ARPU
improved to $20.15 in Q3 2013 from $17.88 in Q1 2012. Furthermore,
the churn rate, which measures the proportion of contractual
customers or subscribers who leave AOL during a given time period,
has declined from 2.0% to 1.4%.
Source: Company 10-Q
To value the existing subscriber base, we calculated the
customer lifetime value (
) metrics, which is a function of ARPU, Churn rate and profit
margins. A standard industry metric for over two decades, CLV
is defined as the present value of the future cash flows attributed
to the customer during his/her entire relationship with the
company. We estimate that due to the improvements in
ARPU and decline in churn rate, AOL's CLV has improved from $245 to
$365 over the last two years. We have used the following
methodology for calculating CLV:
CLV for Q1 2012 = [$17.88 (ARPU) x 27% (
)]/ 2% (
The rising trend in CLV indicates that AOL now has a high value
ARPU in $
Churn Rate (
) in %
Gross Margin (
) in %
CLV = (ARPUxGM)/CR in $
Cash From Subscription Business To Fuel growth In Other
The dial-up Internet subscription business currently contributes
nearly 12% to AOL's estimated value. We believe that this business
will continue to churn out cash, albeit at a declining rate. While
we expect the number of subscribers to decline from 2.5 million in
Q3 2013 to 800,000 by the end of our forecast period, the CLV will
improve to $416 as margins and ARPU improve.
The increase in CLV indicates that the company will continue to
generate more cash per subscriber in the future. We believe that
this cash can be used to finance other business segments such as
online advertising that offer better revenue growth.
According to our estimates, AOL currently derives 30% of its
value from display advertising. While AOL is ranked third among
video content properties in the U.S., it took the top spot for the
number of video ads viewed in September. To improve its content
standing, the company is looking to increase its online video
content and expand its services to new geographies. The company can
plough back some of the cash from its struggling subscription
services into these expansion efforts. As AOL's video content
library improves, we expect user engagement to perk up. User
engagement is important for AOL's overall financial health, as it
not only increases the unique visitor count and page views but also
drives revenue per page view (
) across its properties. We believe that improved video content
will drive the monthly unique visitor count and RPM for AOL.
Currently, we project unique visitor count to increase to 130
million and RPM to grow to $3.4 by the end of our forecast period.
However, if these figures were to increase to 150 million and $4
respectively, our stock price estimate can go up by 10%.
We currently have a
$33.88 price estimate for AOL
, which is approximately 25% below the current market price.
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