AOL Inc. (AOL)

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AOL, Inc. (AOL)

Q4 2012 Earnings Call

February 08, 2013, 08:00 am ET

Executives

Eoin Ryan - SVP, Investor Relations

Tim Armstrong - Chairman & CEO

Artie Minson - COO

Karen Dykstra - CFO

Analysts

Brian Pitz - Jefferies

Ross Sandler - Deutsche Bank

Mark Mahaney - RBC

Benjamin Schachter - Macquarie

Ken Sena - Evercore

Laura Martin - Needham & Company

Youssef Squali - Cantor Fitzgerald

Peter Stabler - Wells Fargo Securities

Deb Schwartz - Goldman Sachs

James Cakmak - Telsey Advisory Group

James Lee - CLSA

Presentation

Operator

Good day ladies and gentlemen, and welcome to AOL Fourth Quarter 2012 Earnings Conference Call. My name is Shaquana and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session. As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Eoin Ryan, Senior Vice President of Investor Relations. Please proceed.

Eoin Ryan

Good morning. Thanks, Shaquana, and everyone for joining us for our fourth quarter 2012 earnings call. You can find our Q4 earnings press release and accompanying slides and trending schedules on our website. On the call with me today is our Chairman and CEO, Tim Armstrong; our COO, Artie Minson; our Chief Financial Officer, Karen Dykstra. Tim and Karen will make some brief remarks on the quarter and our overall strategy, and then we will open up the lines for Q&A.

But first I will remind you that during this call we may discuss our outlook for future financial and operating performance, corporate strategy, marketing and product plans, technology improvements, cost initiatives, planned investments, as well as our expectations for the economy and online advertising in general. These forward-looking statements typically are proceeded by words such as we will, we expect, we believe, we anticipate, or similar statements. These forward-looking statements are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. Reported results should not be indicative of our future performance. Some of these risks have been set forth in our annual report on Form 10-K for the year ended December 31, 2011 filed with the SEC.

All information discussed in this conference call is as of today, February 8 and we do not intend and do not undertake any duty to update this information to reflect future events or circumstances. We will also discuss certain non-GAAP financial measures, including adjusted OIBDA and free cash flow. I will refer you to our press release in Investor Relations section of the website for all comparable GAAP measures and full reconciliations. Finally, from time-to-time we post information about AOL on our Investor Relations website at ir.aol.com and on our official corporate blog at blog.aol.com.

With that, let me get the call going and let me roll the wintry snowball over to Tim.

Tim Armstrong

Thanks, Eoin and good morning, and Eoin just alluded to there is a snowstorm going on but we usually do our earnings call around national disasters, Sandy was the last one, so everybody will be okay. It’s our third anniversary reporting results as a public company and we have good news to report. AOL is back to growth. AOL is at an inflection point as a company and is transitioning into an early stage growth company. We are building the first digital branded media and technology company of the century, a mission we started in 2009. We are driving that mission forward.

Over the past three years ending December 2012, AOL outperformed the S&P, Dow Jones and NASDAQ indices while we have reduced our outstanding share count by roughly 30% giving shareholders a larger ownership stake in a company poised for growth. AOL returned to year-over-year revenue growth for the first time in eight years during Q4. AOL grew adjusted OIBDA in 2012 ahead of our expectations for that to occur in 2013. In three years, we have returned $1.3 billion to shareholders, roughly 50% of the current market cap of the company. Every day has mattered for AOL over the last three years and every day will matter over the next three years as we transition into growth. There are five areas that helped AOL return to growth during Q4.

First is audience growth. Second is revenue growth. Third is continued innovation of world-class products. Fourth is our technology, scale and work. And fifth is talent acquisition. As audience growth continues to improve, consumer traffic showed strong progress in 2012. AOL is growing its users again. In Q4, we grew our usage by 6%, beneath that number is a much stronger trend.

The core focus at AOL over the last three years has been to significantly build up our external audience to replace losses in some of the legacy service businesses. We have made significant progress there. Non legacy users have grown 20% in total from December 2010 to December 2012 at a 10% compounded annual growth rate. Better still engagement from these users has grown rapidly with page views and minutes per month have grown at over 30% compounded annual growth rate.

We are making progress in mobile too. We are the fourth largest player domestically with over 40 million users growing over 10% year-over-year. From a cross platform perspective, the numbers also look encouraging and based on comScore’s new cross-platform measurement AOL attracts 140 million users domestically. AOL experienced one of the largest percentage increases in users under this new measurement method; we have done an exceptionally good job picking up incremental uniques from both mobile and video.

On revenue, revenue growth is happening while we stay vigilant on cost. We grew global advertising revenue by 13% year-over-year. We grew search revenue by 17%. Subscription revenue declined only 10% thanks to 8% growth in ARPU year-over-year and 4% quarter-over-quarter. Our Q4 adjusted OIBDA was $124 million which was ahead of our expectations and the guidance we gave on the last call. Costs were tightly managed in the year with full year adjusted OIBDA expenses ex-TAC, down $66 million. These expenses grew sequentially in Q4, but that is short-term in nature and Karen will speak about that in a few minutes.

In advertising, we continue to improve our yield analytics on both sides of our advertising barbell strategy, programmatic ads and marketing services. AOL is uniquely positioned and scaled in both areas and we have a long-term strategy we are executing. In all during Q4 we worked with 10% more advertisers across AOL properties and AOL networks. We sold over 30% more impressions; we did more business with the AdAge's top 100 in Q4 quarter-over-quarter and year-over-year. We grew our business with the top six agency holding companies in Q4 and quarter-over-quarter as well as year-over-year.

Devil continue to do well with impressions up 13% year-over-year, we are mobilizing around a big push for 2013 and we hope that will be the year of the Devil. Today, there are 52 campaigns running across AOL with 31 different advertisers and we ended up with over 200 partners in the Devil Network.

In Mobile, more advertisers are using our mobile offerings with Mobile revenue growing rapidly off a small base and with Mobile reserved impressions up 82% year-over-year and deliver value up triple digits. The number of advertisers running cross platform campaigns increased by 400% since Q3. At our newly rebranded AOL Networks, we grew the number of publishers we work with by 27%.

During Q4, we had multiple historical record revenue days for ad.com AOL Networks including Black Friday and Cyber Monday. Our DSP is currently ramping with four or the five major trading desks and our total daily run rate is growing at triple digits. Double network closed 2012 over 2011 with significant growth in impression publishers and pricing.

We are building better products over all the business also. HuffPost Live is six months old and gaining significant traction. It was named The Biggest Innovation in Media for 2012 by Mashable. In just six months we had over 128 million video views. We’ve amassed 7.5 million viewers monthly and they are super engaged. They watch for an average of 15 minutes per visit, over 750,000 comments has been left on HuffPost Live and HuffPost Live platform with many of the HuffPost stories and with HuffPost Live videos embedded in them. So we now have a combination of great HuffPost stories and HuffPost Live platform videos integrated together.

Read the rest of this transcript for free on seekingalpha.com