|View printer-friendly version|
|AOL Reports Q3 Earnings|
NEW YORK, Nov 02, 2011 (BUSINESS WIRE) --
AOL Inc. (NYSE: AOL) released third quarter 2011 results today.
"AOL grew global advertising by 8%, driven by 28% and 15% growth in third party network and global display advertising revenue, respectively, substantially closing the gap to revenue and eventual profit growth," said Tim Armstrong, Chairman and CEO. "We continue to build strong consumer experiences as we execute our strategy to build the premium branded media company for the internet. Our share repurchases underlie our belief in the value of AOL and our strategy."
Q3 Noteworthy Items:
DISCUSSION OF RESULTS
Global advertising revenue grew year-over-year in Q3 2011, reflecting double digit growth in both third party network and display revenue, partially offset by declines in search and contextual revenue.
Third party network revenue increased $21.2 million, reflecting 12% growth in Ad.com and $12.1 million related to the acquisitions of 5 Minutes Ltd. and goviral A/S. Third party network revenue growth was partially offset by a decline of $0.7 million related to European shutdowns and the de-emphasis of certain low margin products in 2010.
Global display revenue was driven by a 14% increase in domestic display revenue reflecting improved pricing on premium display advertising and an increase in sellable premium inventory following our acquisitions of The Huffington Post and TechCrunch. The increase in display revenue also reflects improved yield management, an increase in Patch revenue and performance-based fees related to marketing of third party products and services. International display revenue reflects growth in both the Canada and UK. Global display revenue growth was partially offset by a decline of $0.9 million related to the sale of ICQ in July 2010 as well as declines related to reduced operations in Germany and France.
Partially offsetting advertising revenue growth was a decline in search and contextual revenue of $14.6 million which includes $11.8 million primarily related to fewer domestic queries, the majority of which relates to a 15% year-over-year decrease in domestic AOL-brand access subscribers. Search and contextual revenue declines also reflects the $2.0 million impact from fewer international queries. The decline in search and contextual advertising revenue was slightly offset by growth in search revenue on AOL.com.
Subscription revenue declines reflect a 15% and 3% decline in domestic AOL-brand access subscribers and average revenue per subscriber, respectively. During the quarter, AOL began a price rationalization program and migrated certain individuals who did not previously receive access service (and therefore were not included as domestic AOL-brand access subscribers) to a higher priced plan with additional services that included access service. As a result, domestic AOL-brand access subscribers increased by approximately 200,000, leading to a lower year-over-year rate of decline than we have seen in recent quarters. Additionally, monthly average churn fell from 2.6% in Q3 2010 to 2.2% in Q3 2011 and also contributed to the lower rate of decline. The decline in churn primarily reflects a maturing domestic AOL-brand access subscriber base with the average paid tenure approximately 10.6 years in Q3 2011 versus approximately 9.4 years in Q3 2010. The migration of customers to a plan that includes access service (which is at a lower price relative to most of our other price plans) also led to a slightly higher rate of decline in average revenue per subscriber than we have seen in recent quarters.
Other revenue declines primarily reflect lower mobile carrier revenues.
AOL generated a net loss of $2.6 million compared to net income of $171.6 million in the year ago period. This change reflects a gain on the sale of ICQ in the year-ago period, the lower revenue discussed above, increased costs of revenues and a $7.1 million restructuring charge in Q3 2011, partially offset by lower general and administrative expenses. While declining sequentially, costs of revenues grew year-over-year reflecting continued investment in Patch and other areas of strategic focus including acquisitions made late in 2010 and early in 2011. Increased costs of revenue also reflect $9.3 million of increased retention compensation expense associated with acquisitions and $11.3 million of increased traffic acquisition costs (TAC) reflecting increased third party advertising revenue. General and administrative expenses declined year-over-year and sequentially, benefitting from a reduction in personnel and facilities costs mainly related to reduced corporate headcount, due to the impact of strategic initiatives in 2010 to align costs with our structure. The change in net loss also reflects an $8.8 million decrease in depreciation and amortization in Q3 2011 versus Q3 2010 primarily due to a decline in depreciable assets.
AOL had pre-tax income from continuing operations of $7.1 million. However, due to the impact of foreign losses, for which no tax benefit is received on our U.S. income tax provision, we recorded income tax expense of $9.7 million. Due to the size of foreign losses in Q3 2011 relative to AOL's pre-tax income, the Company's effective tax rate of 136.6% for the three months ended September 30, 2011 differs significantly from the statutory U.S. federal income tax rate of 35.0% and from AOL's effective tax rate of 19.6% for the three months ended September 30, 2010. AOL is not currently a cash tax payer.
Q3 2011 cash from continuing operations was $81.1 million while Free Cash Flow was $56.4 million. Cash provided by continuing operations and Free Cash Flow declined versus Q3 2010, primarily reflecting the decrease in operating income (excluding the gain on the sale of our ICQ operations in 2010), partially offset by lower restructuring payments in Q3 2011 as compared to Q3 2010.
Webcast and Conference Call Information
AOL Inc. will host a conference call to discuss third quarter 2011 financial results on Wednesday, November 2, 2011, at 8:00 am Eastern Time (ET). To access the call, parties in the United States and Canada should call toll-free (877) 556-5921 and international parties should call (617) 597-5474. Additionally, a live webcast of the conference call, together with supplemental financial information, can be accessed through the Company's Investor Relations website athttp://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 and international parties should call (617) 801-6888. The access code for the replay is 65945554.
SUPPLEMENTAL INFORMATION - UNAUDITED
Items impacting comparability: The following table represents certain items that impacted the comparability of net income for the three and nine months ended September 30, 2011 and 2010 (In millions, except per share amounts):
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 restructuring costs, non-cash equity-based compensation, gains and losses on all disposals of assets (including those recorded in costs of revenues) and non-cash asset impairments. During the first quarter of 2011, we modified our definition of Adjusted OIBDA to exclude the impacts of restructuring costs, which we do not believe are indicative of our core operating performance, and equity-based compensation, which will allow us to be more closely aligned with the industry and analyst community. 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 or the current or future expected cash expenditures for restructuring costs. The Adjusted OIBDA measure also does not include equity-based compensation, which is and will remain a key element of our overall long-term compensation package. 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 which impact our operating performance. 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"). 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.
Following the acquisition of The Huffington Post on March 4, 2011, AOL aligned all of its content under the newly formed AOL Huffington Post Media Group (HPMG), which is a subset of AOL Properties and excludes Mail, Instant Messaging and AOL Ventures. Unique visitors to The Huffington Post are included subsequent to the acquisition date.
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 Annual Report on Form 10-K for the year ended December 31, 2010 (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. Continual decline in 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 Annual Report as well as, among other things: 1) changes in our plans, strategies and intentions; 2) the impact of significant acquisitions, dispositions and other similar transactions; 3) our ability to attract and retain key employees; 4) any cost reductions, restructuring actions or similar efforts, including with respect to any associated savings, charges or other amounts; 5) market adoption of new products and services; 6) the failure to meet earnings expectations; 7) asset impairments; 8) decreased liquidity in the capital markets; 9) our inability to access the capital markets for debt securities or bank financings; and 10) the impact of "cyber-warfare" or terrorist acts and hostilities.
Having helped millions of Americans to get online, AOL Inc. (NYSE: AOL) is on a mission to inform, entertain and connect the world. The home of a growing collection of premium brands, AOL creates original content that engages audiences on a local and global scale. We help marketers connect with these audiences through effective and engaging digital advertising solutions.
AOL Investor Relations
AOL Investor Relations