AOL Reports Revenue Growth for the First Time in 8 Years in Q4 2012
AOL Reports Revenue Growth for the First Time in 8 Years in Q4 2012
AOL Returns to Full Year Adjusted OIBDA Growth in 2012
AOL Operating Income Grows 24%
AOL's 13% Global Advertising Revenue Growth Drives Total Company Revenue Growth
AOL's Search Revenue Grows 17% Driven by Continued Growth on AOL.com
AOL's Subscription Revenue Declines 10%, Equaling Lowest Percentage Decline in 6 Years
AOL Properties Unique Visitors in Q4 Grew 6% Year-over-Year
Diluted EPS of $0.41 Compares to $0.23 in Q4 2011
AOL Paid a $5.15 per Share Special Dividend Completing the Return of $1.1 Billion to Shareholders
AOL Reduced Common Shares Outstanding by 19% Year-over-Year as of December 31, 2012
AOL's Board Authorizes the Repurchase of up to $100 Million of Common Stock
"AOL returned to growth and generated significant value for shareholders in 2012," said Tim Armstrong, Chairman and CEO. "AOL has strong momentum entering 2013 and is positioned to continue on our growth path by executing our strategy to build the next generation media and technology company."
In millions (except per share amounts)
|Q4 2012||Q4 2011||Change||FY 2012||FY 2011||Change|
|Third Party Network||137.2||104.8||31%||471.6||383.7||23%|
|Adjusted operating income before depreciation and amortization (OIBDA) (1)||$||123.3||$||133.1||-7%||$||412.6||$||408.7||1%|
|Net income attributable to AOL Inc.||$||35.7||$||22.8||57%||$||1,048.4||$||13.1||NM|
|Cash provided by operating activities||$||76.7||$||99.6||-23%||$||365.6||$||296.0||24%|
|Free Cash Flow (1)||$||46.3||$||72.6||-36%||$||245.1||$||164.7||49%|
(1) See Page 10 for a reconciliation of Adjusted OIBDA and Free Cash Flow to the GAAP financial measures the Company considers most comparable.
KEY QUARTERLY TRENDS
Consolidated Revenue Trends:
- Q4 revenue grew year-over-year for the first quarter in 8 years driven by global advertising revenue growth.
- Global advertising revenue grew 13% year-over-year reflecting:
- 31% growth in third party network revenue.
- 17% growth in search revenue (formerly named "search & contextual").
- Flat global display revenue, with a 3% decline in domestic display revenue offset by continued growth in international display revenue.
- Subscription revenue declined 10% year-over-year and monthly average churn was 1.8% in Q4 2012 compared to an 18% decline year-over-year in revenue and 2.2% monthly average churn in Q4 2011.
Consolidated Profitability Trends:
- AOL amended its definition of Adjusted OIBDA in Q4 2012 to exclude significant special items that we do not believe are indicative of our core operating performance. These special items may positively or negatively skew analysis of our operating results in a given period. In 2012, these special items included income and expenses related to the patent transaction as well as expenses incurred related to the proxy contest.
- Q4 2012 Adjusted OIBDA of $123.3 million excluded $13.3 million of special items including $7.1 million of patent sale and license costs, primarily related to a special year-end employee bonus related to the patent transaction, and costs associated with the acquisition of Buysight of $5.1 million. $11 million of these special items are recorded in cost of revenues and $2 million are recorded as general and administrative expenses.
- Cost of revenues increased $29.9 million year-over-year driven by a 25%, or $20.8 million, increase in Traffic Acquisition Costs (TAC) related to 37% growth in AOL Networks (as described below) revenue and increased TAC related to our search marketing initiatives. Cost of revenue increases also reflect the impact of the special items discussed above and were partially offset by lower network related expenses.
- General and administrative expenses grew $5.5 million in Q4 2012 versus the prior year period, which included an $8.5 million legal settlement. The increase in expenses year-over-year primarily reflects a $12 million increase in marketing expense related to the production of a number of brand campaigns across the business and brand portfolio domestically and internationally, some of which are expected to run in 2013.
- Operating income grew year-over-year reflecting a $16.4 million increase to the original gain on the sale of our legacy access businesses in the UK and Germany, due to the release of a VAT indemnification reserve. The increase to the gain on sale had no impact on AOL's cash flows as there was no payment made in connection with the release.
Asset, Cash & Cash Flow Trends:
- In Q4 2012, AOL reduced its shares of common stock outstanding by an additional 14.4 million shares due to shares delivered by Barclays under the Accelerated Stock Repurchase agreement. At December 31, 2012, AOL had 76.6 million common shares outstanding, down 19% from December 31, 2011.
- On December 14th, AOL paid a special cash dividend of $5.15 per share to shareholders of record at the close of business on December 5th, completing its commitment to return $1.1 billion to shareholders in 2012.
- AOL had $466.6 million of cash and equivalents at December 31, 2012. Q4 cash provided by operating activities and Free Cash Flow were $76.7 million and $46.3 million, down year-over-year reflecting the timing of collections of receivables, increased marketing expenditures, acquisition related bonus and retention payments and the payment of a special year-end employee bonus as a result of the patent transaction.
- AOL's Board of Directors announced it authorized the Company to repurchase up to $100 million of its common stock from time-to-time over the course of the next twelve months depending on market conditions, stock price and other factors.
DISCUSSION OF SEGMENT RESULTS
In Q4 2012, AOL began to manage its business on a segmented basis, and therefore is presenting financial information for Q4 2012 and historical periods on the same basis as that reviewed by our management. Our segments are defined by the products and services they provide and by how we evaluate our business. The following are AOL's reportable segments:
- The Brand Group, which consists of the majority of AOL's portfolio of distinct and unique content and service brands. The results for this segment include advertising offerings on a number of owned and operated sites, such as AOL.com, the Huffington Post, Patch, TechCrunch and MapQuest.
- The Membership Group, which consists of offerings that serve AOL's registered account holders, both free and paid, and are focused on delivering world-class experiences to AOL's loyal users who rely on these AOL products and properties every day. The results for this segment include AOL's subscription offerings and advertising offerings on Membership Group properties, such as AOL Mail, as well as from performance compensation for marketing third party products and services.
- AOL Networks, which consists of AOL's offerings to publishers and advertisers utilizing AOL's Third Party Network as well as AOL Properties inventory sold by AOL Networks. The results for this segment include Advertising.com, ADTECH, Pictela, goviral and AOL On.
Additionally, AOL has a corporate and other category that includes activities that are not directly attributable or allocable to a specific segment. This category primarily consists of costs associated with broad corporate functions including legal, human resources, finance and accounting, and activities not directly attributable to a segment such as AOL Ventures, restructuring costs, tax settlements and other general business costs. In 2012, the corporate and other category also includes income from the sale and licensing of patents of $1,042 million (net of transaction costs) and patent and proxy contest expenses of $15.7 million and $8.9 million, respectively. In 2010, this category includes the $1,414.4 million goodwill impairment charge.
The following table highlights the significant products or services included in each segment:
|Brand Group||Membership Group||AOL Networks||Corporate & Other|
|AOL.com||AIM||ADTECH||Global business support costs|
|AOL Autos||AOL Mail||Advertising.com||Non-core operations|
|AOL Music||Subscription Services||AOL On||AOL Ventures|
|DailyFinance||Related search revenue||goviral|
|Huff Post Live||Other|
|Related search revenue|
|Other Content Brands|
DISCUSSION OF SEGMENT RESULTS
|Corporate & Other||0.3||1.2||-75%|
|Corporate & Other||(50.6||)||(46.3||)||-9%|
|Total Adjusted OIBDA||$||123.3||$||133.1||-7%|
Brand Group revenue reflects continued growth in search revenue and international display revenue, which offsets a slight decline in domestic display revenue. Search advertising revenue grew 20% year-over-year driven by continued growth in revenue per search on AOL.com through the optimization of the consumer experience and by increased queries from marketing related efforts. Search revenue growth on AOL.com more than offset a decline in queries from cobranded portals. International display revenue in our Brand Group grew strongly driven by continued growth in Canada and the UK, but was offset by domestic display revenue declines primarily due to an increase in inventory sold through Advertising.com. Domestic display declines were partially offset by growth in reserved pricing and continued growth in the sale of video and Patch inventory. Under our segment reporting structure, Brand Group inventory sold through AOL Networks is recognized in AOL Networks with a corresponding intersegment TAC charge. An amount equal to the TAC charge, reflecting the revenue net of the margin retained by AOL Networks, is then reflected as intersegment revenue within the Brand Group.
Brand Group Adjusted OIBDA declined versus the prior year period, primarily reflecting increased investment in our editorial staff domestically and internationally, an increase in the number of front line sales representatives, particularly in video, and increased marketing expenses. These declines were partially offset by the growth in revenue discussed above and lower year-over-year Patch expenses.
Membership Group revenue reflects a 10% decline in subscription revenue driven by 15% fewer domestic AOL-brand access subscribers year-over-year. Subscription revenue year-over-year declines remained near multi-year lows due to a continued historically low churn rate of 1.8% and 8% year-over-year growth in domestic average monthly revenue per AOL-brand access subscriber (ARPU). Subscription revenue grew sequentially due to 4% growth in ARPU versus Q3 2012. ARPU growth continues to reflect the impact of an ongoing price rationalization program and continued improvement in our retention efforts. Membership Group revenue declines also reflect fewer reserved impressions sold, primarily on AOL Mail, and a shift in the sale of those impressions
to Advertising.com. As is the case in the Brand Group, this revenue is recognized net of the margin retained by AOL Networks. Membership Group advertising revenue declines were partially offset by growth in search revenue.
Membership Group Adjusted OIBDA declines primarily reflect the decline in subscribers during the quarter.
AOL Networks revenue increased 37% versus the prior year period, driven by 31% growth in Third Party Network revenue, which included $9.2 million in advertising revenue sold by Ad.com Japan (AOL began consolidating Ad.com Japan in Q1 2012). Third Party Network revenue reflects revenue from the sale of inventory from third party properties through Advertising.com and its growth continues to be driven by an increasing number of publishers and advertisers on the network as well as increased sales of premium packages and products. AOL Networks revenue growth also reflects an 88% increase in the sale of AOL Properties inventory sold through Advertising.com.
As a result of the growth in revenues, AOL Networks related TAC increased by 29% as compared to the prior year period. The increase in revenues net of TAC was a significant driver in the improvement of AOL Networks Adjusted OIBDA versus the prior year period. Other factors impacting AOL Networks Adjusted OIBDA included a decline in retention compensation expenses and increased year-over-year investment in higher growth areas, particularly in technology and personnel as we continue to build out the capabilities of our technology stack.
Corporate & Other
Corporate & Other Adjusted OIBDA decreased versus the prior year period due to increases in personnel expenses related to 2012 performance bonuses and increased marketing costs versus the prior year period, largely offset by continued expense reduction initiatives.
AOL had Q4 2012 pre-tax income of $67.1 million and income tax expense of $31.7 million, resulting in an effective tax rate of 47.2%. This compares to an effective tax rate of 57.7% for Q4 2011. The effective tax rate for Q4 2012 differed substantially from the statutory U.S. federal income tax rate of 35.0% primarily due to the impact of foreign losses that did not produce a tax benefit and the impact of changes in state tax rates and apportionment on AOL's deferred tax assets. The effective tax rate in Q4 2011 differed from the statutory U.S. federal income tax rate due to the size of foreign losses relative to AOL's pre-tax income and the unfavorable impact of restricted stock unit vesting in Q4 2011.
Q4 2012 cash provided by operating activities was $76.7 million, while Free Cash Flow was $46.3 million, both declining year-over-year reflecting timing of receivable collections, increased marketing expenditures, acquisition-related bonus and retention payments in Q4 2012 and the Q4 2012 payment of a special year-end employee bonus as a result of the patent transaction.
CONSOLIDATED OPERATING METRICS
|Q4 2012||Q4 2011||Y/Y Change||Q3 2012||Q/Q Change|
|Domestic AOL-brand access subscribers (in thousands) (1)||2,794||3,272||-15||%||2,893||-3||%|
|Domestic AOL-brand access subscriber monthly average churn (2)||1.8||%||2.2||%||-18||%||1.8||%||0||%|
|Unique Visitors (in millions)(3)|
|Domestic average monthly unique visitors to AOL Properties||113||107||6||%||111||2||%|
|Domestic average monthly unique visitors to AOL Advertising Network||187||187||0||%||186||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 are only 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.
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.
See "Unique Visitor Metrics" on page 11 of this press release.
Webcast and Conference Call Information
AOL Inc. will host a conference call to discuss fourth quarter 2012 financial results on Friday, February 8, 2013, at 8:00 am ET. To access the call, parties in the United States and Canada should call toll-free (877) 556.5921 and other international parties should call (617) 597.5474. 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 28455276.
Consolidated Statements of Operations
(In millions, except per share amounts)
Three Months Ended December 31,
Years Ended December 31,
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