AOL 2Q12 Earnings: Revenue Decline Moderating and Good Future Growth Prospects
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Yesterday, AOL reported revenues of $531 million well above Consensus estimates of $520 million, representing a 2% YoY decline. This is the smallest decline the company has seen in the last seven years. Although this decline was arguably against a trough comp, we believe that it shows strong fundamentals have started working for AOL (NYSE: AOL) and therefore we maintain our buy rating on this stock.
Analysis by Segments:
1. Advertising Segment: The advertising Segment reported revenues of $338 million up 6% YoY. Within the advertising group, AOL display group reported revenues of $140 million. We expect AOL's content strategy to generate more revenues in the near term as domestic display advertising rose 7% QoQ to $126.8 million improving from the declines in the first quarter (-25% QoQ). There are some concerns over the flat YoY growth of domestic display advertising, but we believe that it is a little early to panic here as the turnaround generally takes time and AOL is progressing on the right track in terms of sequential growth. Search segment decline slowed down as it reported revenues of $87 million and a 1.5 % decline YoY which is the lowest rate of decline in over 3 years. Third party networks continued the trend of solid growth as the revenues grew for the eighth consecutive quarter to $111 million with a 19% YoY increase. With the revenue declines for search moderating, and the display and third party networks showing positive growth trends, we believe that the advertising segment is set to contribute revenues to AOL in the long term.
2. Subscription segment: The subscription segment reported revenues of $176 million down 13% YoY. Subscription declines in the quarter were 84K which was the minimum churn in over a decade due to several retention initiatives taken by AOL. Although the subscription segment continued a fundamentally negative trend, Q2 marked the 5th consecutive quarter of reducing decline rate.
3. Other Segment: Other segment reported revenues of $18mm were down 19% y/y. Other revenue declines could mainly be attributed to the expected decline in mobile carrier revenues which represented 28% of the total “other segment” in 2Q11 and 18% in 2Q12.
Although the domestic display advertising remained flat YoY, we believe that AOL's content strategy could drive revenues in the long term. Total TV advertising was approximately $80 billion in 2011 compared to display advertising of around $15 billion. Though AOL faces risks in the display advertising from Google (NASDAQ: GOOG) and Facebook (NASDAQ: FB), we believe that there is still plenty of scope for display advertising growth. We believe that the company's project devil can tap into this market by monetizing the excellent existing relationships AOL has with the large brand advertisers. We also believe that the investment in Patch will likely pay off next year as it starts generating incremental revenues. The company expects to generate $40-50 million in revenues in 2012 while reaching profitability by the end of 2013. We believe that AOL’s improving fundamentals, moderating revenues declines and powerful product line makes it a good stock for investors and hence maintain our buy rating.
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