What’s Next for AOL?
AOL (NYSE:AOL) was showered with investor affection on Friday following its fourth-quarter and full-year results, released before the markets opened. Shares climbed over 11 percent as the company reported revenue growth for the first time in eight years, spurred by advertising growth at its major web properties such as the Huffington Post and Patch.com.
Briefly, total 4Q revenues grew 4 percent to $599.6 million, while full-year revenues were flat at $2.2 billion. Diluted EPS for the quarter grew an attractive 78 percent to $0.41, but free cash flow decreased 36 percent to $46.3 million. With a strong quarter under its belt, AOL is forecasting full-year revenue growth in 2013.
Every day, AOL is transitioning away from a subscription-based revenue model and toward a more robust and lucrative advertising-driven model. Growth in ad and search revenue, as well as unique visitor growth, will drive the company toward its 2013 goal. But while the results are tremendously positive and indicate future success, they mask one primary underlying weakness…
That weakness is that the segment that AOL derives most of its operating income from — Membership Groups (i.e. subscription services that include the ancient dial-up service) — is the segment seeing declines in revenue.
Membership Groups account for an earned $158.7 million for the company, while total operating income came in at just $123.3 million, reflecting losses in the corporate segment. The Brand Group and AOL Networks, its market to sell advertising inventory on behalf of publishers, accounted for just $15.2 million in operating income. This means that margins in its growth segments are still very low.
So AOL’s plan is to “build the next-generation media and technology company,” according to CEO and chairman Tim Armstrong. While the most-recent earnings suggest that they are executing well with a competent strategy, the road ahead is by no means straightforward.
Lurking somewhere in the media-tech jungle are Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO), each with their eyes on many of the same prizes that AOL is after (namely, search and ad revenue). The two recently announced a non-exclusive agreement in which Yahoo agreed to display advertisements through Google’s AdWords program on unspecific web properties. At minimum, it’s a mutually-beneficial revenue generator.
Beyond that, it could be a long-term partnership that leads to mobile-ad innovation, taking the best from Google’s advertising network and Yahoo’s highly-energized focus on mobile. This mobile transition could be a sore spot for AOL in the future, as its competitors have a head start.
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