AOL
chalked up Q2 net income on Wednesday of $970.8 million, or $10.17 per
share, after losing $11.8 million, or 11 cents per share last year.
Total revenue was down 2 percent to $531.1 million, but beat
expectations of $519.4 million.
“Today’s results represent a
significant milestone for AOL as we returned to Adjusted OIBDA growth
for the first time in four years," said Tim Armstrong, Chairman and CEO.
“The strong results and consumer performance we announced today are
clear signs our strategic and operating efforts are translating into
significant financial progress.”
Revenue Trends:
AOL’s
total revenue declined 2%, its lowest rate of decline in 7 years.
Global Advertising revenue grew 6%, its fifth consecutive quarter of
year-over-year growth, reflecting:
2% year-over-year global display revenue growth, compared to a
1% and 5% decline on a reported and pro-forma basis,
respectively in Q1 (pro-forma includes revenue from The
Huffington Post in both periods).
9% year-over-year growth in combined AOL Properties Display and
Third Party Network revenue, which totaled $251.3 million
for the quarter.
19% growth in Third Party Network revenue, its fifth consecutive
quarter of year-over-year growth.
The lowest rate of search and contextual revenue decline in over
three years of 1%, driven primarily by continued double digit
growth in search revenue on AOL.com.
Subscription revenue trends continued to improve meaningfully with a
12% decline in subscribers the lowest rate of decline in five years,
while monthly average churn of 1.7% was the lowest rate of churn in
over a decade.
Profitability Trends:
AOL grew Adjusted OIBDA 120% year-over-year, the first quarter
of year-over-year growth in over 4 years.
AOL’s
operating income and Adjusted OIBDA was positively impacted by
$96.0 million related to income from licensing patents to
Microsoft Corporation, and negatively impacted by $8.8
million of costs related to the proxy contest, $7.6
million of expenses associated with settling a state tax
matter in Virginia
and $5.6 million of costs related to the patent sale.
Excluding those items, the remaining Q2 2012 Adjusted OIBDA of
$94.6 million reflects an increase of $18 million
year-over-year.
Operating income was also positively impacted by the $945.8
million gain on sale of patents (net of transaction
costs) in Q2.
Product/Consumer Trends:
AOL continued to make progress in key internet growth areas:
Video: AOL grew its videos, video views and video
revenue at double-digit rates both year-over-year and
quarter-over-quarter and video ad impressions grew at
triple-digits year-over-year in Q2 2012.
Brand Advertising: The number of advertisers purchasing Project
Devil ads grew at triple digits year-over-year in Q2 2012 and
over 50% of Project Devil advertisers in Q1 2012 repurchased in
Q2 2012.
Local: Patch grew traffic and engagement at double digit rates
year-over-year and quarter-over-quarter, while revenue grew over
100% year-over-year in Q2 2012.
Traffic: Unique visitors in Q2 2012 were 112 million, growing 4%
from Q1 2012 and 5% from Q4 2011.
Asset, Cash & Cash Flow Trends:
On
June 15th, AOL closed its
$1.056 billion patent transaction with Microsoft
Corporation.
On
June 28th, AOL announced the first
step in a multi-stage approach in returning 100% of the patent
transaction proceeds to shareholders through a $400 million
Dutch Tender offer. The tender offer expires at 5 pm
New York time on August 2nd
unless extended or terminated earlier.
AOL had approximately $1.5 billion of cash at
June 30, 2012. Q2 cash provided by operating activities and
Free Cash Flow were $167.2 million and $136.8
million, up 52% and 77% year-over-year, respectively,
benefiting primarily from the growth in operating income, driven
primarily by the income from licensing of certain patents to
Microsoft Corporation.
Global advertising
revenue grew 6% year-over-year in Q2 2012, reflecting double-digit
growth in Third Party Network revenue and growth in international
display revenue, partially offset by declines in search and contextual
revenue.
Global display revenue grew 2% year-over-year reflecting continued
double-digit growth in international display advertising. Domestic
display advertising revenue was flat year-over-year, versus a 1% and 5%
decline on a reported and pro-forma basis, respectively in Q1 (pro-forma
includes revenue from The Huffington Post in both periods). Domestic
display revenue reflects growth in reserved inventory pricing and Patch
revenue, partially offset by a decline in reserved impressions sold.
International display revenue growth reflects continued growth in both
the U.K. and Canada.
Third Party Network revenue increased $17.8 million, reflecting 11%
growth in Advertising.com and $7.5 million related to the inclusion of
Ad.com Japan. AOL began consolidating the joint venture in Q1 as a
result of acquiring a controlling interest in the joint venture.
Advertising.com growth reflects an increase in publishers on the network
and increased sales of higher margin premium packages and products.
Search and contextual revenue trends continued to improve year-over-year
with a 1% decline representing the lowest rate of decline in over 3
years. Search and contextual revenue declines primarily reflect a 12%
decline in domestic AOL-brand access subscribers and fewer queries from
cobranded portals and international markets, largely offset by continued
growth in search revenue on AOL.com.
Subscription revenue declines reflect a 12% decline in domestic
AOL-brand access subscribers. The decline in subscription revenue was
the lowest level of decline in over 5 years with the trend improvements
reflecting continued improvements in churn and 2% growth in average
revenue per user (ARPU). Monthly average churn fell from 2.2% in Q2 2011
to 1.7% in Q2 2012, driven primarily by significant subscriber retention
efforts and by the continued maturation of the tenured base. ARPU growth
reflects the impact of the price rationalization program AOL began in
late Q3 2011, which significantly reduced the number of price points and
more clearly defined and enhanced the value of our product offerings for
consumers.
Other revenue declines primarily reflect lower mobile carrier revenues.
Revenue from mobile carriers represented 28% of total “Other revenue” in
Q2 2011 and 18% in Q2 2012.
Profitability
AOL’s Adjusted OIBDA grew meaningfully year-over-year primarily
reflecting $96.0 million related to income from licensing patents to
Microsoft, growth in advertising revenue, lower general and
administrative expenses and lower costs of revenues. Adjusted OIBDA was
negatively impacted by $8.8 million of costs related to the proxy
contest, $7.6 million of expenses associated with settling a state tax
matter in Virginia and $5.6 million of costs related to the patent sale.
Excluding the positive impact of the licensing income and the negative
impacts of the proxy contest, tax settlement and patent transaction
expenses, the remaining Adjusted OIBDA of $94.6 million was $18 million
higher than Q2 2011. General and administrative expenses declined
year-over-year reflecting a decline in personnel costs including reduced
corporate headcount and a reduction in marketing costs. Costs of
revenues continued to decline in Q2 2012, driven by lower network
related expenses, personnel costs and reduced content costs related
primarily to AOL’s reduced reliance on freelancers. Cost of revenues
declines were partially offset by $8.1 million of increased TAC, as a
result of continued growth in third party network advertising revenue.
In addition to the above, operating and net income year-over-year growth
primarily reflects the gain on the sale of a portion of our patent
portfolio to Microsoft (net of transaction costs) and a $24.1 million
reduction in depreciation and amortization in Q2 2012 versus Q2 2011.
The year-over-year decline in depreciation and amortization primarily
reflects a decline of $17.3 million related to certain intangible assets
being fully amortized and the decommissioning of certain network
equipment.
Tax
AOL had pre-tax income from operations of $1,058.1 million and a related
income tax expense of $87.5 million, resulting in an effective tax rate
of 8.3% for the three months ended June 30, 2012, as compared to a
negative effective tax rate of 57.3% for the three months ended June 30,
2011. The effective tax rate for the three months ended June 30, 2012
differed substantially from the statutory U.S. federal income tax rate
of 35.0% primarily due to the tax impact of the patent transaction with
Microsoft. The patent transaction consisted of two elements: first, the
sale of patents and the stock of a subsidiary, and second, the licensing
of AOL’s retained patent portfolio, resulting in pre-tax income of
$1,041.8 million. No material cash taxes will be paid, due to existing
net operating losses which offset substantially all of the ordinary
income. However, for book purposes, this transaction resulted in income
tax expense of $71.5 million. The tax expense relates primarily to
ordinary income realized on the transaction, the majority of which is
due to the licensing portion. In addition, the transaction created a
significant net capital loss, for which a valuation allowance was
recorded. In addition to the impacts of the patent transaction on income
tax expense, AOL also had foreign losses that did not produce a tax
benefit.
Cash Flow
Q2 2012 cash provided by operating activities was $167.2 million, while
Free Cash Flow was $136.8 million. Cash provided by operating activities
and Free Cash Flow growth reflects the growth in operating income driven
primarily by patent license income.
Modified Dutch Tender Offer
On June 28, 2012, AOL announced the first step in the multi-stage
process of returning 100% of the patent transaction proceeds to
shareholders through a $400 million modified Dutch auction tender offer.
The $400 million aggregate purchase price of shares of common stock
sought in the tender offer includes the approximately $40 million
remaining from the initial $250 million stock repurchase authorized in
August of 2011. The tender offer began on the date of the announcement,
June 28, 2012, and will expire at 5:00 PM Eastern Time (ET) on August 2,
2012 unless extended or terminated earlier. Through the modified Dutch
tender offer, AOL’s shareholders will have the opportunity to tender
some or all of their shares at a price within the range of $27.00 to
$30.00 per share. If the tender offer is fully subscribed, then shares
of common stock having an aggregate purchase price of $400 million will
be purchased, representing approximately 14% to 16% of AOL’s issued and
outstanding shares as of June 14, 2012 (depending on the final purchase
price).
AOL
chalked up Q2 net income on Wednesday of $970.8 million, or $10.17 per
share, after losing $11.8 million, or 11 cents per share last year.
Total revenue was down 2 percent to $531.1 million, but beat
expectations of $519.4 million.