AOL Slows Its Revenue Decline To Lowest Rate In As Much As 7 YearsBy: Chris Crum - July 25, 2012
AOL released its quarterly earnings report this morning for Q2. The company’s revenue declined by 2%, which AOL points out is the lowest rate of decline in 7 years. The company managed to beat Wall Street expectations.
Ad revenue grew for the fifth consecutive quarter at a rate of 6%. It grew 9% year-over-year. Interestingly, search and contextual revenue saw its lowest rate of decline in over three years at just 1%.
The company grew Adjusted OIBDA 120% year-over-year, marking the first quarter of year-over-year growth in over 4 years.
CEO Tim Armstrong said, “Today’s results represent a significant milestone for AOL as we returned to Adjusted OIBDA growth for the first time in four years. The strong results and consumer performance we announced today are clear signs our strategic and operating efforts are translating into significant financial progress.”
Here’s the release in its entirety:
|AOL REPORTS Q2 EARNINGS|
|Global Advertising Revenue Continues its Trend of Year-Over-Year Growth
Combined AOL Properties Display & Third Party Network Revenue Grows 9% Year-Over-Year
Adjusted OIBDA Grows Year-Over-Year for the First Time in Over 4 Years
Total Revenue Decline the Lowest in 7 Years
Subscription Churn Rate the Lowest in Over a Decade
Search and Contextual Revenue Trends Improve Meaningfully Year-Over-Year
Reported EPS of $10.17 Compared to a Loss Per Share of $0.11 in Q2 2011
$400 Million Dutch Tender Offer the First Step in Returning Approx. $1.1 billion to Shareholders in 2012
Traffic on AOL Properties Grew 4% from Q1 2012 and 5% from Q4 2011
NEW YORK–(BUSINESS WIRE)–Jul. 25, 2012– AOL Inc. (NYSE: AOL) released second quarter 2012 results today.
“Today’s results represent a significant milestone for AOL as we returned to Adjusted OIBDA growth for the first time in four years,” said Tim Armstrong, Chairman and CEO. “The strong results and consumer performance we announced today are clear signs our strategic and operating efforts are translating into significant financial progress.”
(1)See Page 9 for a reconciliation of Adjusted OIBDA and Free Cash Flow to the GAAP financial measures the Company considers most comparable.
KEY QUARTERLY TRENDS
Asset, Cash & Cash Flow Trends:
Global advertising revenue grew 6% year-over-year in Q2 2012, reflecting double-digit growth in Third Party Network revenue and growth in international display revenue, partially offset by declines in search and contextual revenue.
Global display revenue grew 2% year-over-year reflecting continued double-digit growth in international display advertising. Domestic display advertising revenue was flat year-over-year, versus a 1% and 5% decline on a reported and pro-forma basis, respectively in Q1 (pro-forma includes revenue from The Huffington Post in both periods). Domestic display revenue reflects growth in reserved inventory pricing and Patch revenue, partially offset by a decline in reserved impressions sold. International display revenue growth reflects continued growth in both the U.K. and Canada.
Third Party Network revenue increased $17.8 million, reflecting 11% growth in Advertising.com and $7.5 million related to the inclusion of Ad.com Japan. AOL began consolidating the joint venture in Q1 as a result of acquiring a controlling interest in the joint venture. Advertising.com growth reflects an increase in publishers on the network and increased sales of higher margin premium packages and products.
Search and contextual revenue trends continued to improve year-over-year with a 1% decline representing the lowest rate of decline in over 3 years. Search and contextual revenue declines primarily reflect a 12% decline in domestic AOL-brand access subscribers and fewer queries from cobranded portals and international markets, largely offset by continued growth in search revenue on AOL.com.
Subscription revenue declines reflect a 12% decline in domestic AOL-brand access subscribers. The decline in subscription revenue was the lowest level of decline in over 5 years with the trend improvements reflecting continued improvements in churn and 2% growth in average revenue per user (ARPU). Monthly average churn fell from 2.2% in Q2 2011 to 1.7% in Q2 2012, driven primarily by significant subscriber retention efforts and by the continued maturation of the tenured base. ARPU growth reflects the impact of the price rationalization program AOL began in late Q3 2011, which significantly reduced the number of price points and more clearly defined and enhanced the value of our product offerings for consumers.
Other revenue declines primarily reflect lower mobile carrier revenues. Revenue from mobile carriers represented 28% of total “Other revenue” in Q2 2011 and 18% in Q2 2012.
AOL’s Adjusted OIBDA grew meaningfully year-over-year primarily reflecting $96.0 million related to income from licensing patents to Microsoft, growth in advertising revenue, lower general and administrative expenses and lower costs of revenues. Adjusted OIBDA was negatively impacted by $8.8 million of costs related to the proxy contest, $7.6 million of expenses associated with settling a state tax matter in Virginia and $5.6 million of costs related to the patent sale. Excluding the positive impact of the licensing income and the negative impacts of the proxy contest, tax settlement and patent transaction expenses, the remaining Adjusted OIBDA of $94.6 million was $18 million higher than Q2 2011. General and administrative expenses declined year-over-year reflecting a decline in personnel costs including reduced corporate headcount and a reduction in marketing costs. Costs of revenues continued to decline in Q2 2012, driven by lower network related expenses, personnel costs and reduced content costs related primarily to AOL’s reduced reliance on freelancers. Cost of revenues declines were partially offset by $8.1 million of increased TAC, as a result of continued growth in third party network advertising revenue. In addition to the above, operating and net income year-over-year growth primarily reflects the gain on the sale of a portion of our patent portfolio toMicrosoft (net of transaction costs) and a $24.1 million reduction in depreciation and amortization in Q2 2012 versus Q2 2011. The year-over-year decline in depreciation and amortization primarily reflects a decline of $17.3 million related to certain intangible assets being fully amortized and the decommissioning of certain network equipment.
AOL had pre-tax income from operations of $1,058.1 million and a related income tax expense of $87.5 million, resulting in an effective tax rate of 8.3% for the three months ended June 30, 2012, as compared to a negative effective tax rate of 57.3% for the three months ended June 30, 2011. The effective tax rate for the three months ended June 30, 2012 differed substantially from the statutory U.S. federal income tax rate of 35.0% primarily due to the tax impact of the patent transaction with Microsoft. The patent transaction consisted of two elements: first, the sale of patents and the stock of a subsidiary, and second, the licensing of AOL’s retained patent portfolio, resulting in pre-tax income of $1,041.8 million. No material cash taxes will be paid, due to existing net operating losses which offset substantially all of the ordinary income. However, for book purposes, this transaction resulted in income tax expense of $71.5 million. The tax expense relates primarily to ordinary income realized on the transaction, the majority of which is due to the licensing portion. In addition, the transaction created a significant net capital loss, for which a valuation allowance was recorded. In addition to the impacts of the patent transaction on income tax expense, AOL also had foreign losses that did not produce a tax benefit.
Q2 2012 cash provided by operating activities was $167.2 million, while Free Cash Flow was $136.8 million. Cash provided by operating activities and Free Cash Flow growth reflects the growth in operating income driven primarily by patent license income.
Modified Dutch Tender Offer
On June 28, 2012, AOL announced the first step in the multi-stage process of returning 100% of the patent transaction proceeds to shareholders through a $400 million modified Dutch auction tender offer. The $400 million aggregate purchase price of shares of common stock sought in the tender offer includes the approximately $40 million remaining from the initial $250 million stock repurchase authorized in August of 2011. The tender offer began on the date of the announcement, June 28, 2012, and will expire at 5:00 PM Eastern Time (ET) on August 2, 2012 unless extended or terminated earlier. Through the modified Dutch tender offer, AOL’s shareholders will have the opportunity to tender some or all of their shares at a price within the range of$27.00 to $30.00 per share. If the tender offer is fully subscribed, then shares of common stock having an aggregate purchase price of $400 million will be purchased, representing approximately 14% to 16% of AOL’s issued and outstanding shares as ofJune 14, 2012 (depending on the final purchase price).
Webcast and Conference Call Information
AOL Inc. will host a conference call to discuss second quarter 2012 financial results on Wednesday, July 25, 2012, at 8:00 am ET. To access the call, parties in the United States and Canada should call toll-free (866) 700-0161 and other international parties should call (617) 213-8832. Additionally, a live webcast of the conference call, together with supplemental financial information, can be accessed through the Company’s Investor Relations website at http://ir.aol.com. In addition, an archive of the webcast can be accessed through the link above for one year following the conference call, and an audio replay of the call will be available for two weeks following the conference call by calling (888) 286-8010 and other international parties should call (617) 801-6888. The access code for the replay is 42487690.
SUPPLEMENTAL INFORMATION – UNAUDITED
Items impacting comparability: The following table represents certain items that impacted the comparability of net income attributable to AOL Inc. for the three and six months ended June 30, 2012 and 2011 (In millions, except per share amounts):
Note Regarding Non-GAAP Financial Measures
This press release and its attachments include the financial measures Adjusted OIBDA and Free Cash Flow, both of which are defined as non-GAAP financial measures by the Securities and Exchange Commission (SEC). These measures may be different than similarly-titled non-GAAP financial measures used by other companies. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with generally accepted accounting principles (GAAP). Explanations of our non-GAAP financial measures are as follows:
Adjusted OIBDA. We define Adjusted OIBDA as operating income before depreciation and amortization excluding the impact of restructuring costs, noncash equity-based compensation, gains and losses on all disposals of assets (including those recorded in costs of revenues) and noncash asset impairments and write-offs. We consider Adjusted OIBDA to be a useful metric for management and investors to evaluate and compare the ongoing operating performance of our business on a consistent basis across reporting periods, as it eliminates the effect of noncash items such as depreciation of tangible assets, amortization of intangible assets that were primarily recognized in business combinations, asset impairments and write-offs, as well as the effect of restructurings and gains and losses on asset sales, which we do not believe are indicative of our core operating performance. We exclude the impacts of equity-based compensation to allow us to be more closely aligned with the industry and analyst community. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our business or the current or future expected cash expenditures for restructuring costs. The Adjusted OIBDA measure also does not include equity-based compensation, which is and will remain a key element of our overall long-term compensation package. Moreover, the Adjusted OIBDA measures do not reflect gains and losses on asset sales or impairment charges and write-offs related to goodwill, intangible assets and fixed assets which impact our operating performance. We evaluate the investments in such tangible and intangible assets through other financial measures, such as capital expenditure budgets, investment spending levels and return on capital.
Free Cash Flow. We define Free Cash Flow as cash provided by operating activities, less capital expenditures and product development costs and principal payments on capital leases. We consider Free Cash Flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the continuing business that, after capital expenditures and product development costs and principal payments on capital leases, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening the balance sheet. Analysis of Free Cash Flow also facilitates management’s comparisons of our operating results to competitors’ operating results. A limitation on the use of this metric is that Free Cash Flow does not represent the total increase or decrease in cash for the period because it excludes certain non-operating cash flows.
Unique Visitor Metrics
We utilize unique visitor numbers to evaluate the performance of AOL Properties. In addition, we utilize unique visitor numbers to evaluate the reach of our total advertising network, which includes both AOL Properties and the Third Party Network. Unique visitor numbers provide an indication of our consumer reach. Although our consumer reach does not correlate directly to advertising revenue, we believe that our ability to broadly reach diverse demographic and geographic audiences is attractive to brand advertisers seeking to promote their brands to a variety of consumers without having to partner with multiple content providers. The source for our unique visitor information is a third party (comScore Media Metrix, or “Media Metrix”). While we are familiar with the general methodologies and processes that Media Metrix uses in estimating unique visitors, we have not performed independent testing or validation of Media Metrix’s data collection systems or proprietary statistical models, and therefore we can provide no assurance as to the accuracy of the information that Media Metrix provides.
Cautionary Statement Concerning Forward-Looking Statements
This press release and our conference call at 8:00 a.m. Eastern Time today may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding business strategies, market potential, future financial and operational performance and other matters. Words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “will,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. These forward-looking statements are based on management’s current expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances. Except as required by law, we are under no obligation to, and expressly disclaim any obligation to, update or alter any forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise. Various factors could adversely affect our operations, business or financial results in the future and cause our actual results to differ materially from those contained in the forward-looking statements, including those factors discussed in detail in the “Risk Factors” section contained in our Annual Report on Form 10-K for the year endedDecember 31, 2011 (the “Annual Report”), filed with the Securities and Exchange Commission. In addition, we operate a web services company in a highly competitive, rapidly changing and consumer- and technology-driven industry. This industry is affected by government regulation, economic, strategic, political and social conditions, consumer response to new and existing products and services, technological developments and, particularly in view of new technologies, the continued ability to protect intellectual property rights. Our actual results could differ materially from management’s expectations because of changes in such factors. Achieving our business and financial objectives, including growth in operations and maintenance of a strong balance sheet and liquidity position, could be adversely affected by the factors discussed or referenced under the “Risk Factors” section contained in the Annual Report as well as, among other things: 1) changes in our plans, strategies and intentions; 2) continual decline in market valuations associated with our cash flows and revenues; 3) the impact of significant acquisitions, dispositions and other similar transactions; 4) our ability to attract and retain key employees; 5) any negative unintended consequences of cost reductions, restructuring actions or similar efforts, including with respect to any associated savings, charges or other amounts; 6) market adoption of new products and services; 7) the failure to meet earnings expectations; 8) asset impairments; 9) decreased liquidity in the capital markets; 10) our ability to access the capital markets for debt securities or bank financings; and 11) the impact of “cyber-warfare” or terrorist acts and hostilities.
AOL Inc. (NYSE: AOL) is a brand company, committed to continuously innovating, growing, and investing in brands and experiences that inform, entertain, and connect the world. The home of a world-class collection of premium brands, AOL creates original content that engages audiences on a local and global scale. We help marketers connect with these audiences through effective and engaging digital advertising solutions.
Source: AOL Inc.