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The Key Takeaways From AOL’s Q2 Earnings

August 19, 2014 | About:

The New York-based multinational mass media company AOL Inc. (AOL) reported its second-quarter earnings on August 6, posting total revenue of $606.8 million, and beat Street estimates of $595 million. This phenomenal jump in revenue was attributed to the steep increase of 60% in advertising revenue on the third-party platform.

Let’s plunge directly into the numbers reported in the quarter for gaining better insight.

Ad revenue climbs

AOL did report a solid quarter in terms of sales that rose 12% over last year – thanks to advertising segments revenue. AOL’s revenue was boosted by the company’s “platforms” business that comprises a collection of tools and services aimed at aiding web publishers sell ads. The company has been aggressively developing its programmatic ads platform to sell more ads on third-party sites.

The revenue growth from third-party display ads has been quite encouraging. In the second quarter the division grew by a whopping 60% to $194.3 million from that reported a year ago. Behind such impressive growth was the increase in sale of premium ads across AOL’s platform and the synergies from its combination with Adap.tv.

AOL completed acquisition of Adap.tv last year, which is a video advertising platform in a deal valued at $405 million. Through the acquisition AOL aims at improving its presence in the programmatic buying ad area, besides creating a video advertising platform for itself to post ads directly on online video. This acquisition has benefited the company phenomenally as its third-party network revenue rose by 20% barring the effect of the acquisition for the quarter.

Revenue from search ads rose by 6% and played a significant role in bolstering the quarterly revenue. The search across AOL is powered by Google (NASDAQ:GOOG), which also reported a surge in the ad volumes in its quarterly earnings. Though search ads are not big contributors to AOL’s total revenue, the optimism shown by Google in terms of search ads serves as a real boost to the search ad revenue of the company.

However, the display ads revenue went marginally down this quarter by 1% to $144.1 million, primarily affected by the absence of $15 million in revenue due to the sale of the majority stake in its local news business Patch.

Profit faces temporary dip

AOL’s profit ticked lower by 1% to $28.2 million or $0.34 per share from $28.5 million or $0.35 per share reported a year earlier. The earnings per share of $0.34 per share was not comparable to the analysts’ expectations of $0.44 per share this quarter.

This drop in profit was chiefly the impact of increased amortization expenses from the three recent AOL acquisitions either completed last year or the beginning of this year – Adap.tv, the web personalization tech company Gravity and digital ad targeting firm Coverto.

Other factors that had a bearing on the profit were the cost of revenue that increased by a good $58 million due to increase in traffic acquisition costs, search marketing related efforts and development cost of the third-party platform.

Cash flow is solid

AOL continues to generate significant amount of cash on an annual basis. Free cash flow at the end of the second quarter stood at $88 million, nearly 53% higher than a year ago. The company generated $126 million cash from operating activities, a 41% jump from $89.4 million a year earlier.

To add to investors’ delight, AOL repurchased 1.6 million shares of common stock in the second quarter. Additionally on July 28, AOL’s Board of Directors has authorized a new share repurchase program which brings the current share repurchase authorization to $150 million.

Wrapping up

AOL’s CEO, Tim Armstrong, at the earnings call stated – “AOL's future as a scaled media technology company continues to get stronger. AOL grew consumer usage, video, programmatic advertising, branded content and ad pricing throughout the first half of 2014, and we will continue to make AOL one of the best operating companies in our industry.” Taking a cue from his words, it can be concluded that AOL is on a fabulous growth trajectory right now and its second quarter earnings have testified to the fact that AOL’s future continues to grow stronger.

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