AOL Reports Q3 Earnings

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AOL Reports Q3 Earnings

7% Global Advertising Revenue Growth Drives Best Year-Over-Year Revenue Performance in Over 7 Years

12% Adjusted OIBDA Growth Marks the Second Consecutive Quarter of Year-Over-Year Growth


8% Search and Contextual Revenue Growth Represents the First Growth Quarter in Over 3 Years

Subscription Revenue Trends Improve Meaningfully With The Lowest Rate of Decline in Over 6 Years

AOL Properties Unique Visitors Grew 4% from Q3 2011

Reported EPS of $0.22 Compares to a Loss Per Share of $0.02 in Q3 2011

23% Growth in Cash Provided by Operating Activities Drives 27% Free Cash Flow Growth

AOL Is Positioned to Reduce its Shares Outstanding By Approximately 30% From Its High by Year-End

NEW YORK--(BUSINESS WIRE)-- AOL Inc. (NYS: AOL) released third quarter 2012 results today. "We just reported the best relative revenue performance in seven years and the second consecutive quarter of year-over-year profit growth, exceeding our expectations," said Tim Armstrong, Chairman and CEO. "We have positioned AOL for growth in 2013 and beyond with consumer and advertiser demand growing for our premium content and innovative products, video, services and ad formats."

Summary Results
In millions (except per share amounts)
Q3 2012Q3 2011Change
Revenue

Advertising

$ 340.0 $ 317.7 7%

Subscription

173.5 191.9 -10%

Other

18.2 22.1 -18%
Total revenues $ 531.7 $ 531.7 0%
Adjusted operating income before depreciation and amortization (OIBDA) (1) $ 97.9 $ 87.2 12%
Restructuring costs $ 0.4 $ 7.1 -94%
Operating income $ 43.1 $ 8.6 401%
Net income (loss) attributable to AOL Inc. $ 20.8 $ (2.6) NM
Diluted EPS $ 0.22 $ (0.02) NM
Cash provided by operating activities $ 101.8 $ 82.5 23%
Free Cash Flow (1) $ 71.5 $ 56.4 27%

(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

Revenue Trends:

  • AOL's total revenue was flat year-over-year, representing AOL's best revenue performance in over 7 years.
  • Global Advertising revenue grew 7%, its sixth consecutive quarter of year-over-year growth, reflecting:
    • 7% year-over-year growth in combined AOL Properties Display and Third Party Network revenue, which totaled $248.2 million for the quarter.
    • 18% growth in Third Party Network revenue, its sixth consecutive quarter of year-over-year growth.
    • 8% year-over-year growth in Search and Contextual revenue, representing AOL's first quarter of year-over-year growth in over 3 years, driven primarily by continued double-digit growth in search revenue on AOL.com.
  • Subscription trends continued to improve meaningfully with a 10% decline in revenue year-over-year and 1.8% monthly average churn compared to a 22% decline year-over-year in revenue and 2.2% monthly average churn in Q3 2011.

Profitability Trends:

  • AOL grew Adjusted OIBDA 12% year-over-year, the second consecutive quarter of year-over-year growth.
  • AOL reduced Adjusted OIBDA expenses excluding Traffic Acquisition Costs (TAC) and one-time items sequentially for the fifth consecutive quarter. Additionally, these expenses declined $26.6 million, or 7% year-over-year in Q3 2012.

Product/Consumer Trends:

  • AOL continued to make progress in key internet growth areas:
    • Video: The AOL On Network grew rapidly in both usage and revenue in Q3 2012, rising to the 2nd largest video network by views per comScore and growing revenue at double-digit rates both year-over-year and quarter-over-quarter in Q3 2012.
    • Brand Advertising: Increased advertiser adoption of AOL premium formats contributed to higher year-over-year reserved inventory pricing with the number of advertisers purchasing Project Devil ads continuing to grow at double-digit rates year-over-year and advertiser repeat usage of Devil remaining very strong.
    • Advertising.com: The number of publishers joining the Advertising.com network and the number of impressions available for sale to advertisers continued to grow at double-digit rates, while the number of video impressions sold grew over 100% from Q3 2011.
    • Local: Patch grew its traffic 19% year-over-year in September to 11.9 million unique visitors per comScore and frequency of visits grew both quarter-over-quarter and year-over-year.
    • Traffic: Unique visitors to AOL Properties in Q3 2012 were 111 million, growing 4% year-over-year.

Asset, Cash & Cash Flow Trends:

  • On August 3rd, AOL announced the expiration of its modified "Dutch Auction" tender offer and the repurchase of approximately 300,000 shares of AOL's common stock at $30.00 per share.
  • On August 27th, AOL announced its method of returning $1.1 billion, or 100% of the patent transaction proceeds, to shareholders through a fixed dollar collared Accelerated Stock Repurchase (ASR) agreement with Barclays Bank PLC. (Barclays) and the authorization of a $5.15 per share special, one-time, cash dividend.
  • In addition to the approximately 300,000 shares acquired from the Dutch Auction, AOL has reduced its shares outstanding by a further 10.5 million shares as of today, based on shares delivered by Barclays under the ASR agreement. AOL expects to receive approximately 8 million additional shares by December 31, 2012, at which time AOL's shares outstanding should be approximately 77 million shares. This represents an approximate 30% reduction in AOL's shares outstanding from a high of approximately 107 million shares in 2011.
  • AOL had approximately $867 million of cash and equivalents at September 30, 2012. Q3 cash provided by operating activities and Free Cash Flow were $101.8 million and $71.5 million, up 23% and 27% year-over-year, reflecting growth in operating income.

DISCUSSION OF RESULTS

Revenue

Revenue Summary

Q3 2012Q3 2011Change
(In millions)
Advertising revenue

Display

$ 135.4 $ 136.7 -1%

Display - domestic

122.5125.8-3%Q3 2012Q3 2011Change

Display - international

12.910.918%

Search and contextual

91.8 85.1 8% AOL Properties Display $ 135.4 $ 136.7 -1%

AOL Properties

227.2 221.8 2% Third Party Network 112.8 95.9 18%

Third Party Network

112.8 95.9 18%AOL Properties Display &
Total advertising revenue 340.0 317.7 7%Third Party Network$248.2$232.67%
Subscription revenue 173.5 191.9 -10%
Other revenue 18.2 22.1 -18%
Total revenue$531.7$531.7 0%

Total revenue was flat year-over-year, representing AOL's best year-over-year revenue performance in 7 years. Global advertising revenue grew 7% year-over-year in Q3 2012, reflecting continued double-digit growth in Third Party Network revenue, growth in Search and Contextual revenue for the first time in over 3 years and double-digit growth in international display revenue, partially offset by a decline in domestic display revenue.

Third Party Network revenue increased 18%, reflecting 8% growth in Advertising.com revenues and $9.6 million related to the inclusion of Ad.com Japan, which AOL began consolidating in Q1 2012. Advertising.com growth reflects an increase in publishers on the network and increased sales of premium packages and products, including video.

Search and contextual revenue grew year-over-year for the first time in over 3 years, driven by continued growth in search revenue on AOL.com through the optimization of both the consumer and advertiser experiences and by increased queries from marketing related efforts. Search and contextual revenue growth was impacted by a decline in queries from domestic AOL-brand access subscribers and from cobranded portals.

Global display revenue declined 1% year-over-year, reflecting a 3% decline in domestic display revenue, partially offset by double-digit growth in international display advertising revenue. Domestic display revenue declined due to a reduction in the sale of reserved inventory, but was partially offset by an increase in the number of impressions sold through Ad.com, growth in reserved pricing due to the increased sales of premium formats and video and strong revenue growth from Patch. International display revenue growth reflects continued growth in both the UK and Canada.

Subscription revenue declined 10%, its lowest rate of decline in over 6 years driven by continued lower churn versus the prior year period and 6% growth in domestic average monthly subscription revenue per AOL-brand access subscriber (ARPU), partially offset by a 16% decline in domestic AOL-brand access subscribers. ARPU growth reflects the impact of an ongoing price rationalization program. The program began in Q3 2011 and included the migration of certain individuals who had not previously received access service (and therefore were not included as domestic AOL-brand access subscribers) to a higher priced plan with additional services including the access service. This program, as previously disclosed, increased the number of AOL-brand access subscribers by approximately 200,000, positively impacting the total number of subscribers beginning in Q3 2011 and accounting for the sequential increase in the rate of decline in subscribers from 12% in Q2 to 16% in Q3 2012. Other revenue declines primarily reflect lower mobile carrier revenues. Revenue from mobile carriers represented 24% of total "Other revenue" in Q3 2011 and 8% in Q3 2012.

Profitability

AOL's operating income and Adjusted OIBDA grew meaningfully year-over-year primarily reflecting growth in advertising revenue, and lower costs of revenues. Costs of revenues continued to decline in Q3 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 $13.1 million of increased TAC, primarily due to continued growth in Third Party Network advertising. Net and operating income also benefitted from a year-over-year decline in depreciation and amortization of $17.6 million related to certain intangible assets being fully amortized and the decommissioning of certain network equipment.

Tax

AOL had pre-tax income from operations of $45.1 million and a related income tax expense of $24.4 million, resulting in an effective tax rate of 54.1% for the three months ended September 30, 2012, as compared to an effective tax rate of 136.6% for the three months ended September 30, 2011. The effective tax rate for the three months ended September 30, 2012 differed substantially from the statutory U.S. federal income tax rate of 35.0% primarily due to foreign losses that did not produce a tax benefit.

On August 27th, AOL adopted a Tax Asset Protection Plan (the "TAPP") in an effort to preserve its significant domestic tax attributes, the utilization of which could be prohibited or significantly delayed should a "change of control" be triggeredunder Section 382 of the Internal Revenue Code of 1986, as amended. The TAPP is intended to act as a deterrent to any individual, individual fund or family of funds with common dispositive power of acquiring 4.9% or more of the AOL's outstanding shares without the approval of the Board of Directors. Unless otherwise restricted, AOL can utilize these tax attributes in certain circumstances to offset future U.S. taxable income, including in connection with capital gains that may be generated from a potential asset sale. AOL believes the implementation of the TAPP will serve the interests of all shareholders given the size of its domestic tax assets and the potential damage that could occur should a change of control occur. This plan is similar to other arrangements adopted by many other public companies with significant tax attributes.

Cash Flow

Q3 2012 cash provided by operating activities was $101.8 million, while Free Cash Flow was $71.5 million, up 23% and 27% year-over-year, respectively. Cash provided by operating activities and Free Cash Flow growth both reflect the year-over-year improvement in operating income.

Accelerated Stock Repurchase Agreement and Special Cash Dividend

On August 26, 2012, AOL entered into the ASR Agreement with Barclays effective August 27, 2012. Under the ASR Agreement, on August 30, 2012, we paid $654.1 million from cash on hand to Barclays to repurchase outstanding shares of common stock. The consideration paid to Barclays included $54.1 million in contemplation of the special cash dividend discussed further below, which was calculated as the present value of the special cash dividend with respect to those shares deliverable under the ASR Agreement prior to the ex-dividend date.The purchase price is also subject to floor and cap provisions establishing a minimum and maximum number of repurchased shares. The special cash dividend will be payable on December 14, 2012 to shareholders of record at the close of business on December 5, with an ex-dividend date of December 3, 2012.

OPERATING METRICS

Q3 2012Q3 2011Y/Y ChangeQ2 2012Q/Q Change
Subscriber Information

Domestic AOL-brand access subscribers (in thousands) (1)

2,893 3,452 -16% 3,031 -5%

ARPU (1)

$ 18.47 $ 17.49 6% $ 17.92 3%

Domestic AOL-brand access subscriber monthly average churn (2)

1.8% 2.2% -18% 1.7% 6%

Unique Visitors (in millions)(3)

Domestic average monthly unique visitors to AOL Properties

111 107 4% 112 -1%

Domestic average monthly unique visitors to AOL Advertising Network

186 187 -1% 186 0%
(1)

Domestic AOL-brand access subscribers include subscribers participating in introductory free-trial periods and subscribers that are paying no monthly fees or reduced monthly fees through member service and retention programs. Individuals, who have registered for our free offerings, including subscribers who have migrated from paid subscription plans, are not included in the AOL-brand access subscriber numbers presented above. ARPU is calculated as average monthly subscription revenue divided by the average monthly subscribers for the applicable period.

(2)

Churn represents the percentage of subscribers that are either terminated or cancel our services, factoring in new and reactivated subscribers. Monthly average churn is calculated as the monthly average number of terminations plus cancellations divided by the initial subscriber base plus any new registrations and reactivations for the applicable period.

(3)

See "Unique Visitor Metrics" on page 10 of this press release.

Webcast and Conference Call Information

AOL Inc. will host a conference call to discuss third quarter 2012 financial results on Tuesday, November 6, 2012, at 8:00 am ET. To access the call, parties in the United States and Canada should call toll-free (888) 396.2369 and other international parties should call (617) 847.8710. Additionally, a live webcast of the conference call, together with supplemental financial information, can be accessed through the Company's Investor Relations website athttp://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 79845370.

FINANCIAL STATEMENTS

AOL Inc.
Consolidated Statements of Comprehensive Income
(Unaudited; in millions, except per share amounts)
Three Months Ended September 30,Nine Months Ended September 30,

2012

201120122011
Revenues:

Advertising

$ 340.0 $ 317.7 $ 1,007.9 $ 950.4

Subscription

173.5 191.9 531.1 608.6

Other

18.2 22.1
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