AOL Reports Revenue and Profit Growth in Q2

AOL Reports Revenue and Profit Growth in Q2

AOL Agrees to Acquire Adap.tv, a Rapidly Growing and Leading Unified Programmatic Video Platform for $405 Million

AOL Believes Its Combination with Adap.tv Creates the World's Most Powerful Cross-Screen Solution for Brands, Agencies and Publishers

Growth Continues in All Advertising Revenue Lines for the Second Consecutive Quarter

Domestic and International Markets Drive Global Display Revenue Growth

AOL Grows Adjusted OIBDA 14% and Expands Adjusted OIBDA Margin by Over 200 Basis Points

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

Q2 2013 Operating Income, Net Income and EPS Comparability Impacted byAOL's $1 Billion Patent Transaction with Microsoft in Q2 2012

AOL Repurchased 1.4 Million Shares of Common Stock in Q2 2013 for Approximately $50 Million

AOL's Board of Directors Authorized an Additional $150 Million Share Repurchase

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

"AOL takes a major step forward today with another quarter of growth and our agreement to acquire the Adap.tv video marketplace platform that will make AOL a clear global leader in the most important growth segment in our industry - online video," said Tim Armstrong, AOL Chairman and CEO. "AOL continued to get leaner during Q2 while growing consumer traffic, growing all advertising revenue lines, and improving our subscription trends."

Adap.tv Brings to AOL:

• The only complete global programmatic video stack for publishers and advertisers across all screens;

• A unified yield management platform for advertisers and publishers for planning, targeting, ad-serving and measurement;

• One of the fastest growing platforms on the internet, with global revenue growth in excess of 100% per year in each of the last three years;

• Wide adoption by the largest global advertisers and publishers, including 83 out of the Ad Age 100 and 70 of the comScore 100;

• A talented team which has driven innovation in the automation of global video advertising.

Q2 Consolidated AOL Revenue Trends:

• Q2 total revenue grew 2% year-over-year driven by global advertising revenue growth.

• Global advertising revenue grew 7% year-over-year reflecting:

  • 5% growth in global display revenue reflects 3% and 19% growth in domestic and international display revenue, respectively, driven by increased reserved impressions sold on AOL Properties.

  • 9% growth in Third Party Network revenue driven by growth in premium formats sold across the network where the number of publishers and advertisers continues to grow.

  • 8% growth in global search revenue driven primarily by an increase in revenue per search on AOL.com.

• Subscription revenue declined 5% year-over-year and domestic AOL-brand access subscriber monthly average churn was 1.4% in Q2 2013 compared to a 13% decline year-over-year in subscription revenue and 1.7% monthly average churn in Q2 2012.

Q2 Consolidated AOL Profitability Trends:

• AOL's Q2 2012 operating income, net income and diluted EPS were favorably impacted by $1.04 billion, $970 million and $10.16, respectively resulting from its patent transaction with Microsoft. Excluding this impact, operating income, net income and diluted EPS grew significantly.

• Adjusted OIBDA grew 14% year-over-year, driven by total revenue growth of 2% and declines in general and administrative expenses, partially offset by increased costs of revenue.

• Cost of revenues increased $3.7 million year-over-year driven by a 17% increase in Traffic Acquisition Costs (TAC) resulting from growth in search marketing related expenses and 9% growth in Third Party Network revenue, largely offset by lower network related expenses and a decline in sales tax expense of $7.6 million related to a Virginia sales tax settlement in Q2 2012.

• General and administrative expenses declined $31.2 million in Q2 2013 versus Q2 2012, due to a decline in legal and consulting fees, including the absence of patent and proxy related expenses and the reimbursement in Q2 2013 of legal expenses from prior periods related to an escrow settlement.

AOL Asset, Cash & Cash Flow Trends:

• On July 1, 2013, AOL entered into a five-year $250 million senior secured revolving credit facility agreement with a syndicated bank lending group. The credit facility remains undrawn.

• In Q2 2013, AOL repurchased 1.4 million shares of common stock at an average price of $35.63, or approximately $50 million in aggregate, leaving approximately $50 million on our previous authorization. On July 1, 2013, AOL's Board of Directors authorized a $150 million share repurchase, bringing AOL's remaining repurchase authorization to $200 million.

• AOL had $483.4 million of cash and equivalents at June 30, 2013. Q2 cash provided by operating activities and Free Cash Flow were $89.4 million and $57.3 million, respectively, down year-over-year due to the $96 million benefit in Q2 2012 related to the licensing of patents to Microsoft. The Q2 2013 Free Cash Flow comparison to the prior year was also negatively impacted by the early receipt in Q1 2013 of a prepayment from a large partner that was received last year during Q2.

Brand Group

Brand Group revenue growth reflects continued growth in global display and search revenue. Brand Group display revenue grew 9% globally driven by an increase in Brand Group inventory sold on a reserved basis. Brand Group search revenue grew 12% year-over-year driven primarily by revenue per search growth on AOL.com.

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 search marketing-related initiatives, which drove additional queries during the quarter. Brand Group Adjusted OIBDA reflects our investment for future growth in our editorial and engineering staff in areas of strategic focus.

Membership Group

Membership Group revenue declines reflect a 5% decline in subscription revenue driven by 15% fewer domestic AOL-brand access subscribers year-over-year. The continued moderation of subscription revenue declines was driven by a historically low churn rate of 1.4% and 12% 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 Adjusted OIBDA declines primarily reflect the decline in subscription revenue discussed above, partially offset by a decline in segment operating costs.

AOL Networks

AOL Networks revenue increased 5% year-over-year, driven by growth in Third Party Network revenue on the increased sale of premium formats across the network where the number of publishers and advertisers continues to grow. AOL Network's year-over-year revenue comparison was negatively impacted by the absence of revenue from the divestiture of StudioNow in Q1 2013. StudioNow contributed $3.2 million in revenue to AOL Networks in Q2 2012. To a lesser extent, AOL Networks revenue growth was impacted by a decline in revenue from the sale of Brand Group and Membership Group inventory through AOL Networks, as more of that inventory was sold on a reserved basis than in Q2 2012.

AOL Networks Adjusted OIBDA decreased year-over-year due to higher research and product development costs primarily related to continued investment in premium formats as well as Ad Learn Open Platform (our demand-side platform) and AdTech MARKETPLACE (our supply-side platform). AOL Networks-related TAC increased by 7%, slower than the rate of growth of Third Party Network revenue.

Corporate & Other

Corporate & Other Adjusted OIBDA improved significantly year-over-year primarily driven by declines in marketing and outside services costs as a result of our cost reduction efforts as well the reimbursement in Q2 2013 of legal expenses from prior periods related to an escrow settlement.

Tax

AOL had Q2 2013 pre-tax income of $51.2 million and income tax expense of $23.2 million, resulting in an effective tax rate of 45.3%. This compares to an effective tax rate of 8.3% for Q2 2012. The effective tax rate for Q2 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 Q2 2012 differed from the statutory U.S. federal income tax rate due to the tax impact of the patent transaction with Microsoft in Q2 2012.

Cash Flow

Q2 2013 cash provided by operating activities was $89.4 million, while Free Cash Flow was $57.3 million, both down year-over-year due to the $96 million benefit to operating income in Q2 2012 related to the licensing of patents to Microsoft. Q2 2013 Free Cash Flow comparison to the prior year was also negatively impacted by the early receipt in Q1 2013 of a prepayment from a large partner. In the prior year, the prepayment from this partner was received in Q2.

Subsequent Event

On August 5, 2013, AOL entered an agreement to acquire Adap.tv for shares of AOL common stock with an aggregate value of approximately $83 million and estimated cash consideration of approximately $322 million, subject to adjustment for working capital and reduction for indebtedness and transaction expenses of Adap.tv that remain unpaid as of closing.

Adap.tv is a leading and global unified programmatic video platform powering video advertising for brand advertisers, agencies, publishers and ad networks. Adap.tv's platform allows buyers and sellers to make decisions together on a unified technology platform, leveraging comprehensive data intelligence, across all screens. The combination of AOL and Adap.tv is expected to create the only global company with a full end-to-end solution and video stack for publishers and advertisers.

This acquisition is subject to customary conditions, including expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The acquisition is expected to close in the third quarter of 2013.