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|AOL Reports Q4 Earnings|
NEW YORK, Feb 02, 2011 (BUSINESS WIRE) -- AOL Inc. (NYSE: AOL) released fourth quarter 2010 results today.
"I am very proud of what we accomplished in 2010 as we began the year with a significant restructuring of AOL and ended the year with a significantly improved balance sheet, a number of exciting new products and a new culture focused on winning," said Tim Armstrong, Chairman and CEO. "We have set aggressive goals for ourselves in 2011 in pursuit of capturing the growing opportunity ahead of us."
DISCUSSION OF RESULTS
Advertising revenue declined $137.0 million versus Q4 2009 of which $80.2 million related to AOL-implemented initiatives and comprises: $53.0 million in lower Third Party Network revenue associated with European shutdowns and de-emphasis of low margin search engine campaign management and lead generation affiliate products; $13.4 million in lower international display revenue related to reduced operations in Germany and France and the absence of revenue from Bebo and ICQ which we sold earlier in 2010; and $13.8 million in lower search and contextual revenue from our de-emphasis of contextual products, fewer queries in Germany and France where we have reduced operations and the absence of revenue from ICQ.
Apart from the impacts of AOL-implemented initiatives, advertising revenue further reflects declines in search and contextual, display and Third Party Network revenue. Search and contextual revenue declines of $35.2 million include $25.0 million related to fewer domestic queries, due to a 23% year-over-year decrease in domestic AOL-brand access subscribers and lower traffic on AOL Properties, as well as a $10.2 million impact from fewer international queries. Display revenue declines of $11.9 million reflect a slight decline in domestic premium inventory sales as well as less AOL Properties inventory monetized through our network, resulting primarily from our efforts to improve the consumer experience. Premium inventory sales declines reflect the fact that the Company began the quarter with a significantly smaller pipeline, due to the impact on sales of the salesforce reorganization in Q1 2010, which was largely offset by incremental revenue generated during the quarter. Q4 2010 domestic display revenue includes approximately $2 million in revenue related to acquisitions made in Q3 2010. Third Party Network revenue declined $9.7 million primarily reflecting increased competition at Ad.com, partially offset by approximately $2 million in revenue related to acquisitions made in Q3 2010.
Subscription revenue declines primarily reflect the 23% decline in domestic AOL-brand access subscribers noted above, partially offset by an increase of $5.4 million related to a favorable resolution of a legal dispute over revenue related to certain customers. Monthly average churn for the period was 2.3%, as compared to 3.0% in the prior year period, and the average paid tenure of our domestic AOL-brand access subscribers has increased to 9.5 years this period from 8.8 years in the prior year period. Average revenue per user declined 2.2% year-over-year.
Other revenue declines reflect lower mobile carrier and licensing revenues, partially offset by increases in third party web hosting revenues and transition services revenue associated with recent dispositions.
Adjusted OIBDA increased reflecting reduced costs of revenues, restructuring costs and selling, general and administrative expenses partially offset by the revenue declines discussed above. The reduced operating costs included Traffic Acquisition Costs (TAC), personnel-related expenses and network-related costs. TAC declined $91.1 million year-over-year reflecting lower partner revenue share in Europe associated with the cessation of operations in certain countries and reduced operations in France and Germany, as well as the de-emphasis of low margin advertising products. The decline in TAC also reflects the Q1 2010 amendment of a large distribution agreement. Lower personnel-related expenses continue to reflect reduced headcount resulting from the restructuring initiatives we began in 2009, partially offset by increased hiring for Patch and other strategic areas. Operating income also reflects a $25.3 million decrease in depreciation and amortization in Q4 2010 versus the prior year period, primarily due to a higher percentage of in-service assets being fully depreciated and certain intangible assets becoming fully amortized in periods prior to Q4 2010.
Our effective tax rate for income from continuing operations was 13.2% for the three months ended December 31, 2010, as compared to an effective tax rate of 90.1% for the three months ended December 31, 2009. The effective tax rate for the three months ended December 31, 2010 decreased from the statutory U.S. federal income tax rate of 35.0% and the effective tax rates for the three months ended December 31, 2009 primarily due to the effect of the goodwill impairment charge (recorded in the second quarter of 2010 and the majority of which was non-deductible for income tax purposes), partially offset by the impact of foreign valuation allowances on the annual effective tax rate. Additionally, the rate was decreased by the Company's recognition of $8.2 million of benefit related to the release of foreign reserves.
Our effective tax rate for income from continuing operations was 18.4% for the year ended December 31, 2010, as compared to an effective tax rate of 45.4% for the year ended December 31, 2009. The effective tax rate for the year ended December 31, 2010 decreased from the statutory U.S. federal income tax rate of 35.0% and the effective tax rate for the year ended December 31, 2009 primarily due to the effect of the goodwill impairment charge (the majority of which was non-deductible for income tax purposes), partially offset by the effect of the Bebo worthless stock deduction recorded in the second quarter of 2010.
Q4 2010 cash provided by continuing operations and Free Cash Flow were $107.1 million and $70.6 million, respectively. Cash provided by continuing operations and Free Cash Flow declined compared to Q4 2009, as the increase in Adjusted OIBDA was more than offset by working capital changes due to the timing of operating cash payments and receipts.
Acquisitions of Pictela, About.me and goviral
In December 2010, we completed the acquisitions of Pictela and About.me for $31.4 million in the aggregate, net of cash acquired.In addition, we have agreed to pay an aggregate of $11.5 million to certain employees of the acquired companies over the next three years contingent on their future service to AOL. This $11.5 million of contingent consideration will be treated as compensation expense for accounting purposes.
On January 31, 2011, we completed the purchase of goviral A/S, a company incorporated and registered in Denmark, for $74.1 million, net of cash acquired, subject to working capital adjustments. In addition, the Company has agreed to pay $22.6 million to certain employees of goviral over the next two years contingent on their future service to the Company. This $22.6 million will be treated as compensation expense for accounting purposes. goviral distributes branded online video for media agencies, creative agencies and content producers.
On July 8, 2010, we completed the sale of our ICQ operations ("ICQ") for $187.5 million in cash (subject to working capital adjustments) to Digital Sky Technologies Limited, now known as Mail.ru Group Limited ("Mail.ru"). We recorded a pre-tax gain on the sale of $119.6 million within discontinued operations in the third quarter of 2010. As part of the sale transaction, we agreed to provide certain network infrastructure services to Mail.ru for a limited period of time.
After our disposition of ICQ, the Committee on Foreign Investment in the United States (''CFIUS'') contacted Mail.ru and, subsequently, Mail.ru and AOL submitted a joint voluntary filing to CFIUS commencing a review of the transaction under Section 721 of Title VII of the Defense Production Act of 1950, as amended. AOL and Mail.ru are currently working with CFIUS to address their concerns. As a result of this process, it is probable that we will agree to provide certain network infrastructure and other operational services to Mail.ru at a level and for a period in excess of our contractual obligations under the original transaction agreements as well as other modifications to the parties' respective obligations under the transaction agreements.
As of the date of this earnings release, our estimate of the range of loss to be incurred as a result of these developments is $13.6 million to $28.1 million, the aggregate cap under the original transaction agreements for losses in connection with providing the network infrastructure services. Given that no amount within the range of loss appears to be a better estimate as of the date of this release, in our fourth quarter and full year 2010 consolidated statement of operations we have accrued a loss of $13.6 million, the low end of the range of estimated loss, and reflected such loss as a reduction to the previously recorded $119.6 million gain. The CFIUS process is ongoing and if there are any significant developments between now and the filing of our Annual Report on Form 10-K, including a change in our estimated range of loss, we will update our disclosure and results of operations for the year and three months ended December 31, 2010, in our Annual Report on Form 10-K to reflect such developments.
Given the probable extension and modification of the services we are providing to ICQ, we have concluded that the ICQ operations, for the period prior to the sale, no longer meet the criteria for presentation as discontinued operations. As a result, we have recast the financial condition, results of operations and cash flows of the ICQ operations through the date of sale within continuing operations for all periods presented. The financial condition, results of operations, and cash flows of ICQ continue to be excluded from AOL's financial results for all periods subsequent to July 8, 2010.
Webcast and Conference Call Information
AOL Inc. will host a conference call to discuss fourth quarter 2010 financial results on Wednesday, February 2, 2011, at 8:00 am Eastern Time (ET). To access the call, parties in the United States and Canada should call toll-free (866) 713-8310 and international parties should call (617) 597-5308. Additionally, a live webcast of the conference call, together with supplemental financial information, can be accessed through the Company's Investor Relations website at http://ir.aol.com. In addition, an archive of the webcast can be accessed through the link above for one year following the conference call, and an audio replay of the call will be available for two weeks following the conference call by calling (888) 286-8010. The access code for the replay is 37458830.
SUPPLEMENTAL INFORMATION - UNAUDITED
Items impacting comparability: The following table represents certain items that impacted the comparability of net income attributable to AOL Inc. for the three months and years ended December 31, 2010 and 2009 (In millions, except per share amounts):
Basis of Presentation
The financial information for all prior periods presented has been recast so that the basis of presentation is consistent with that of the financial information for the three months and year ended December 31, 2010. This recast reflects the financial condition, results of operations and cash flows of buy.at as discontinued operations and the financial condition, results of operations and cash flows of ICQ as continuing operations for all periods presented. The financial condition, results of operations, and cash flows of ICQ continue to be excluded from AOL's financial results for all periods subsequent to July 8, 2010.
Note Regarding Non-GAAP Financial Measures
This press release and its attachments include the financial measures Adjusted OIBDA and Free Cash Flow, both of which are defined as non-GAAP financial measures by the Securities and Exchange Commission (SEC). These measures may be different than similarly-titled non-GAAP financial measures used by other companies. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with generally accepted accounting principles (GAAP). Explanations of our non-GAAP financial measures are as follows:
Adjusted OIBDA. We define Adjusted OIBDA as operating income before depreciation and amortization excluding the impact of gains and losses on all disposals of assets (including those recorded in costs of revenues) and non-cash asset impairments. We consider Adjusted OIBDA to be a useful metric for management and investors to evaluate and compare the ongoing operating performance of our business on a consistent basis across reporting periods, as it eliminates the effect of non-cash items such as depreciation of tangible assets, amortization of intangible assets that were primarily recognized in business combinations and asset impairments, as well as the effect of gains and losses on asset sales, which we do not believe are indicative of our core operating performance. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our business. Moreover, the Adjusted OIBDA measures do not reflect gains and losses on asset sales or impairment charges related to goodwill, intangible assets and fixed assets. We evaluate the investments in such tangible and intangible assets through other financial measures, such as capital expenditure budgets, investment spending levels and return on capital.
Free Cash Flow. We define Free Cash Flow as cash provided by continuing operations, less capital expenditures and product development costs and principal payments on capital leases. We consider Free Cash Flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the continuing business that, after capital expenditures and product development costs and principal payments on capital leases, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening the balance sheet. Analysis of Free Cash Flow also facilitates management's comparisons of our operating results to competitors' operating results. A limitation on the use of this metric is that Free Cash Flow does not represent the total increase or decrease in cash for the period because it excludes certain non-operating cash flows and the results of discontinued operations.
Unique Visitor Metrics
We utilize unique visitor numbers to evaluate the performance of AOL Properties. In addition, we utilize unique visitor numbers to evaluate the reach of our total advertising network, which includes both AOL Properties and the Third Party Network. Unique visitor numbers provide an indication of our consumer reach. Although our consumer reach does not correlate directly to advertising revenue, we believe that our ability to broadly reach diverse demographic and geographic audiences is attractive to brand advertisers seeking to promote their brands to a variety of consumers without having to partner with multiple content providers. The source for our unique visitor information is a third party (comScore Media Metrix, or "Media Metrix"). Media Metrix estimates unique visitors based on a sample of internet users in various countries (referred to as the "panel-only methodology"). While we are familiar with the general methodologies and processes that Media Metrix uses in estimating unique visitors, we have not performed independent testing or validation of Media Metrix's data collection systems or proprietary statistical models, and therefore we can provide no assurance as to the accuracy of the information that Media Metrix provides.
Media Metrix announced the availability of an alternate methodology (currently referred to as "panel-centric unified" or "Media Metrix 360") to estimate unique visitors, in order to provide a more accurate count of a website's audience, and has continued to refine this methodology. We adopted this alternate methodology for domestic unique visitors to AOL Properties and AOL Media starting December 2009 and going forward. As a result, our domestic unique visitor numbers based on Media Metrix 360 will not be comparable to the estimates under the previous methodology. For comparison purposes, domestic unique visitors to AOL Properties and AOL Media are reported, in Operating Metrics within this press release, under both the Media Metrix 360 and panel-only methodology for the fourth quarter of 2010.
Cautionary Statement Concerning Forward-Looking Statements
This press release and our conference call at 8:00 a.m. Eastern Time today may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 regarding business strategies, market potential, future financial and operational performance and other matters. Words such as "anticipates," "estimates," "expects," "projects," "forecasts," "intends," "plans," "will," "believes" and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. These forward-looking statements are based on management's current expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances. Except as required by law, we are under no obligation to, and expressly disclaim any obligation to, update or alter any forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise. Various factors could adversely affect our operations, business or financial results in the future and cause our actual results to differ materially from those contained in the forward-looking statements, including those factors discussed in detail in the "Risk Factors" section contained in our Quarterly Report on Form 10-Q for the three months ended September 30, 2010 (the "Quarterly Report") and our Annual Report on Form 10-K for the year ended December 31, 2009 (the "Annual Report"), filed with the Securities and Exchange Commission. In addition, we operate a web services company in a highly competitive, rapidly changing and consumer and technology-driven industry. This industry is affected by government regulation, economic, strategic, political and social conditions, consumer response to new and existing products and services, technological developments and, particularly in view of new technologies, the continued ability to protect intellectual property rights. Our actual results could differ materially from management's expectations because of changes in such factors. Further, lower than expected market valuations associated with our cash flows and revenues may result in our inability to realize the value of recorded intangibles and goodwill. In addition, achieving our business and financial objectives, including growth in operations and maintenance of a strong balance sheet and liquidity position, could be adversely affected by the factors discussed or referenced under the "Risk Factors" section contained in the Quarterly Report and the Annual Report as well as, among other things: 1) changes in our plans, strategies and intentions; 2) our ability to attract and retain key employees; 3) the success of any cost reductions, restructuring actions or similar efforts, including with respect to any associated savings, charges or other amounts; 4) the impact of significant acquisitions, dispositions and other similar transactions; 5) the failure to meet earnings expectations; 6) asset impairments; 7) decreased liquidity in the capital markets; 8) our inability to access the capital markets for debt securities or bank financings; and 9) the impact of "cyber-warfare" or terrorist acts and hostilities.
AOL Inc. (NYSE: AOL) is a leading global web services company with an extensive suite of brands and offerings and a substantial worldwide audience. AOL's business spans online content, products and services that the company offers to consumers, publishers and advertisers. AOL is focused on attracting and engaging consumers and providing valuable online advertising services on both AOL's owned and operated properties and third-party websites. In addition, AOL operates one of the largest internet subscription access services in the United States, which serves as a valuable distribution channel for AOL's consumer offerings.
SOURCE: AOL Inc.
AOL Investor Relations