It is a merry time for digital advertisers and after the robust performance exhibited by the likes of Google, Facebook and LinkedIn, it is time for another media conglomerate to join the party. Yes, I am talking about AOL Inc (AOL, Financial) which has been trading in the green after it posted a total revenue of $606 million (a growth of 12% year-over-year) and beat the Street expectations. The phenomenal increase in revenue was driven by a jump of approximately 60% in advertising revenue in its third-party platform. Let us discuss if the stock represents a lucrative buy after the solid results.
A Progressive report card
Before we dive into a discussion of the potential implications of these results, let us take a while to talk about the further details of AOL’s Q2 report card. As I mentioned above, the company’s revenue rose approximately 12%, but the profit figure edged down around 1% as an increase in costs masked the notable increase in advertising revenue. AOL’s profit for the quarter came in at $28.2 million or 34 cents a share from $28.5 million in the year ago period. The cost of revenue escalated $58 million from the prior year period on account of increased traffic acquisition costs (TAC) including the Adap.tv acquisition. Just to give context, AOL acquired Adap.tv, a video advertising platform in 2013 in a deal valued at $405 million.
Ad Tech could be the new growth driver
Besides creating a video advertising platform in order to shift the ad dollars from traditional TV to online video, one of the other motives behind taking over Adap.tv was its established presence in the programmatic ad buying area. CEO Timothy Armstrong quite strongly advocated the programmatic ad buying mechanism under which advertisers can buy and sell online ad spots through bidding via computers, based on a set of predecided rules. Thanks to its implementation, AOL’s advertising revenue from third-party platform jumped to $194.3 million. The reason programmatic buying has become quite famous in the advertising space is because it provides an easy and cost-efficient way for marketers to target web surfers based on consumer data and their web browsing history.
In fact, a few days back, AOL teamed up with French advertising company Havas SA under which Havas’s global programmatic trading desk Affiperf will use AOL’s programmatic platform ONE across more than 100 countries, offering marketers automated ad buying on media outlets ranging from video to mobile. Thus, it is not difficult to interpret the significance of this ad-buying mechanism for AOL and investors can expect a significant surge in revenue from third parties in the future.
In a move to gain more ad dollars, AOL has now adopted a strategy for building up original content for its video networks. Now, this strategy will complement the automated ad buying mechanism that the company is trying to get into because it will create an efficient video ads ecosystem. According to estimates, the third-party display ads division constitutes over 35% of AOL’s value. In the previous quarter, the real-time bidding platform propelled revenues for this division. The sale of video ads through Adap.tv was one of the primary contributors to revenue growth in Q1 2014.
Another interesting contributor to AOL’s overall revenue is search ads and in the recent quarter, the company’s search revenues rose around 6%. Search across AOL is powered by Google which reported a surge in ad volumes in its quarterly earnings. Even though the search ads is not a big contributor to the company’s revenue but the optimism showcased by Google in terms of search ads can be a big boost to the search revenue of AOL.
Takeaway
The strength of AOL’s quarterly results has testified the fact that AOL’s future as a scaled media technology company continues to get stronger. Additionally, the praiseworthy thing is that the company has grown stronger across all business areas including consumer usage, video, programmatic advertising, branded content, and ad pricing. Also, the company is trading at a forward multiple of 15.62 as compared to the industry average of around 29.4 thereby representing a valuable buy.
