AOL's Revenue and Profit Growth Continues

AOL's Revenue and Profit Growth Continues

Growth in All Advertising Revenue Lines For The First Time in 5 Years Drives Total Revenue Growth

AOL's Return to Global Display Revenue Growth Drives Total Advertising Growth

AOL Properties' Unique Visitors Grew 3% Year-over-Year

AOL Grew Global Display Revenue 8% Year-over-Year

AOL Grew Third Party Network Revenue 10%, its 8^thConsecutive Quarter of Year-over-Year Growth

AOL Grew Global Search Revenue 9%, its 3^rdConsecutive Quarter of Year-over-Year Growth

AOL's Subscription Revenue Declined 9% Year-over-Year, Compared to a 15% Decline in Q1 2012

AOL Grew Adjusted OIBDA 12% and Operating Income 59% Year-over-Year

Diluted EPS of $0.32 Compares to $0.22 in Q1 2012

NEW YORK--(BUSINESS WIRE)-- AOL Inc. (NYS: AOL) released first quarter 2013 results today.

"Growth continues at AOL," said Tim Armstrong, Chairman and CEO. "AOL's strategy of being the first scaled media and technology company is clearly represented in our results today, and we will continue to aggressively drive the company toward near-and long-term growth."

KEY QUARTERLY TRENDS

Consolidated Revenue Trends:

• Q1 total revenue grew 2% year-over-year driven by global advertising revenue growth, which marked the second consecutive quarter of year-over-year growth.

• Global advertising revenue grew 9% year-over-year reflecting:

  • 8% growth in global display revenue driven by 6% growth in domestic display revenue and continued double-digit growth in international display revenue. Domestic display revenue growth reflects an increase in AOL Properties impressions sold, including video and mobile inventory, and improved reserved pricing related to the sales of video and other premium formats.

  • 10% growth in third party network revenue driven by an increase in publishers and advertisers on the network, increased sales of video and growth in Canada.

  • 9% growth in search revenue driven by increased global queries from marketing related efforts and continued growth in revenue per search on AOL.com, partially offset by declines resulting from our 15% decline in domestic AOL-brand access subscribers, declines in search on co-branded portals and decreased queries in the United Kingdom.

• Subscription revenue declined 9% year-over-year and monthly average churn was 1.9% in Q1 2013 compared to a 15% decline year-over-year in subscription revenue and 2.0% monthly average churn in Q1 2012.

Consolidated Profitability Trends:

• Q1 2013 operating income and Adjusted OIBDA increased 59% and 12% year-over-year, respectively, driven by total revenue growth and declines in general and administrative expenses, partially offset by increased costs of revenue.

• Cost of revenues increased $8.5 million year-over-year driven by a 21%, or $16.8 million, increase in Traffic Acquisition Costs (TAC) resulting from increased expenses related to our search marketing initiatives and 8% growth in AOL Networks revenue. Cost of revenue increases were partially offset by two different sales and use tax matters, one of which impacted Q1 2012 while the other was resolved in Q1 2013 as well as lower network related expenses.

• General and administrative expenses declined $13.4 million in Q1 2013 versus the prior year period, due to a decline in personnel-related costs as well as decreases in legal and consulting fees due in part to prior year proxy contest costs.

Asset, Cash & Cash Flow Trends:

• AOL had $467.8 million of cash and equivalents at March 31, 2013. Q1 cash provided by operating activities and Free Cash Flow were $40.6 million and $9.8 million, respectively, both growing year-over-year. Growth primarily reflects the receipt of a significant prepayment in Q1 2013 received from a large partner, whereas the prior year prepayment was received early in the second quarter.

• On August 26, 2012, AOL entered into a fixed dollar collared accelerated stock repurchase agreement (ASR Agreement) with Barclay's Capital Inc. ("Barclays"). Barclays completed the ASR Agreement on April 22, 2013, and since the final volume-weighted average price of AOL common stock was above the adjusted cap price established under the ASR Agreement, no additional shares will be delivered. The total amount of shares repurchased by AOL under the ASR Agreement was 18.4 million shares at a cap price of $32.69.

DISCUSSION OF SEGMENT RESULTS

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 AOL's portfolio of distinct and unique content and certain 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. The results for this segment include AOL's subscription offerings and advertising offerings on Membership Group properties including communications products, 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, Be On (formerly 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 tax settlements and other general business costs.

The following table highlights the significant products or services included in each segment:

Brand Group

Brand Group revenue reflects global display revenue growth and continued growth in search revenue. Brand Group display revenue grew globally driven by an increase in Brand Group inventory sold, including video inventory, and increased pricing of reserved 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. Search revenue grew 16% year-over-year driven by marketing related efforts and continued growth in revenue per search on AOL.com. Search revenue growth on AOL.com more than offset a decline in queries from cobranded portals.

Brand Group Adjusted OIBDA improved significantly versus the prior year period, primarily due to the growth in search and display revenue discussed above partially offset by increased TAC as a result of our marketing-related initiatives on search. While significantly improved, Brand Group Adjusted OIBDA remains negative reflecting our investment in Patch and in our editorial and engineering staff at our core brands and in our sales force domestically and internationally.

Membership Group

Membership Group revenue reflects a 9% 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 1.9% and 7% year-over-year growth in domestic average access subscription monthly revenue per AOL-brand access subscriber (ARPU). ARPU growth reflects continued improvement in our retention efforts and the impact of a price rationalization program. Membership Group revenue declines also reflect lower advertising revenue due to 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 also reflect fewer search queries due to the aforementioned decline in subscribers.

Membership Group Adjusted OIBDA declines primarily reflect the decline in subscribers during the quarter.

AOL Networks

AOL Networks revenue increased 8% year-over-year, driven by 10% growth in Third Party Network revenue. 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 including video.

AOL Networks Adjusted OIBDA decreased year-over-year due to higher research and product development costs primarily related to continued investment in Adlearn Open Platform (our demand-side platform) and the launch of AdTech MARKETPLACE (our supply-side platform). AOL Networks-related TAC increased by 11%, slightly faster than Third Party Network revenue due to a shift in the product mix, including growth from the lower margin Buysight offering which AOL acquired in December 2012.

Corporate & Other

Corporate & Other Adjusted OIBDA improved significantly year-over-year primarily due to a $16.1 million decline in costs, which included reductions in corporate personnel and personnel-related expenses, lower marketing related expenses, and a favorable impact resulting from two different sales and use tax matters, one of which impacted Q1 2012 and the other was resolved in Q113.

Tax

AOL had Q1 2013 pre-tax income of $47.1 million and income tax expense of $21.5 million, resulting in an effective tax rate of 45.6%. This compares to an effective tax rate of 47.2% for Q1 2012. The effective tax rate for Q1 2013 differed 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. The effective tax rate for Q1 2012 differed from the statutory U.S. federal income tax rate due to the impact of foreign losses that did not produce a benefit and a change in state tax rates.

Cash Flow

Q1 2013 cash provided by operating activities was $40.6 million, while Free Cash Flow was $9.8 million, both up year-over-year driven mainly by the growth in operating income, lower deferred compensation payments in 2013 and the timing of receipt of a significant prepayment from a large partner, where in the prior year, the second quarter prepayment was received early in the second quarter. These increases were partially offset by higher employee bonus payments in the first quarter of 2013 compared to the first quarter of 2012 and timing of payments for certain marketing and legal payments.