AOL Growth Saga Continues
Mihir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Around 3 months back, when I wrote this article, it was an eventful period for AOL (NYSE: AOL), as it had posted a revenue growth on a y-o-y basis for the first time in 8 years. The impressive thing is that it has maintained that feat by delivering good growth in Q1. Its share price took a good beating because the results fell short of Street expectations. But in spite of the fact that results were below expectations, I am highly confident about its growth trajectory.
Growth continues, but...
For the first quarter, total revenue grew 2% y-o-y as a result of a 9% increase in global advertising revenue. The company came back on display revenue growth with 6% growth in domestic display revenue and double-digit growth in international display revenues. Display is becoming a major venue of advertising for big companies, as it allows for maximum creativity in messaging at reasonable costs. As a result, large advertising giants like AOL and Google (NASDAQ: GOOG) are pumping up their video and mobile inventories.
Subscription revenue is a miss
While advertising revenue was a hit in this quarter, subscription revenue was a miss with a decline of 9% y-o-y. It is a fact that a major chunk of its revenue comes from the membership group wherein the main component is subscription services, but I am not that disappointed with a decline because I can see strong trends in play.
The decline in revenue has propelled AOL to pack a host of new products into the offering with a motive to sell it more as a cluster of diverse products rather than just a service that gets people online. It is also worthwhile to note that ARPU increased by 7% to just over $19, which reflects adoption of price rationalization methods adopted by the management.
Good results bring joy
The highlight of the results were a growth in all advertising products, which led to a growth of 9% in global ad revenue. Advertisers are now using online media as a tool to build a brand rather than just a source to gain sales leads. As a result, these advertisers are willing to spend big bucks in display and related products that offer the freedom to create unique, long and interactive messaging in order to promote the brand. AOL is doing a commendable job in capitalizing on such needs with its video and mobile solutions on the display front.
Industry titans Google and Yahoo!
A company that has grown unthinkably fast in the digital advertising space is none other than the internet giant Google. From Google search to Youtube, Gmail, mobile and GDN, it has a huge product portfolio to meet various advertising needs. The company reported robust first quarter results, with a revenue of $13.97 billion, up 31% from last year. Remarkably, the traffic acquisition costs have remained constant at 25% of revenues for the last few quarters. The most recent innovation in Google Adwords (its advertising program) is the addition of images alongside ads. The feature is still in beta phase and has been made available to certain high end advertisers.
My point here is that Google utilizes its resources very well to cater to every possible demand from advertisers. Hence, advertisers who are keen to form long-term partnerships find Google to be an apt partner.
It has been almost a year since Marissa Mayer joined Yahoo! (NASDAQ: YHOO) as its Chief Executive, and what an eventful time it has been! She has been on a major acquisition spree, with the most recent being the Tumblr deal in an effort to promote entrepreneurial spirit at Yahoo! as well as capturing market share inorganically. It paid a consideration of $1.1 billion for Tumblr, which is expected to grow Yahoo!’s audience by 50% and traffic by 20%.
Even though the first quarter revenue declined by 7% y-o-y, Mayer seems quite confident about her company's future mainly because her major concern right now is simply to bring back Yahoo! to its position from a decade back, when it was an internet user’s favorite. Like Google, it has adopted the user first philosophy and as time goes by, this should pay off handsomely.
Financial numbers reflect strength
Coming back to AOL, let us look at some impressive numbers. OIBDA for the quarter was $105 million, up 12% y-o-y, while the total revenue increased by a mere 2%. One of the factors behind achieving good margin is excellent cost management as the company reduced considerable personnel related and marketing expense. Recently it was reported that the company’s Patch unit might lay off 3% of its staff in an effort to consolidate operations and enhance profitability.
The company’s brand group has been doing well, driven by the success of HuffingtonPost, TechCrunch and Engadget. All these news and information sites are eying expansions in different markets, including Europe and Asia. Being a small player in display ads, it has delivered good growth and acquired a spot for itself in the display league.
As you might have noticed, I have mentioned the term “growth” several times during the article. It is because growth is what keeps me optimistic about AOL. I agree that some of its businesses are facing a bit of a tough time, but with diligence and patience they can be easily turned around. AOL is definitely on a strong growth track, and I would rate it as a sure buy.
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Mihir Mehta owns shares of Google. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!