AOL Display Picture Appears Mixed, As International Improves

In all, AOL's advertising revenues would seem to be on solid footing, rising 23 percent overall in Q1, according to the company's earnings release this morning. But display, which had been growing double-digits for the past year has stalled with a mere 1 percent gain in total and a 1 percent decline domestically. It was the international side of the display ledger where things seemed to be surging, as revenues jumped 34 percent. 

While Q1 is typically a weak ad spending period, it's worth pointing out that in Q1 2011,  worldwide display revenue was up 4 percent, representing the first quarter of year-over-year growth since the last quarter of 2007. U.S. display at the time rose 11 percent in Q1 2011, or 6 percent excluding acquisitions.

Still, investors will have enough to cheer about this time out, as AOL's profits shot up nearly 400 percent to $21.1 million ($0.22 cents a share) from $4.7 million $0.04 cents a share) during Q1 2011. On an adjusted basis, net income was $0.31 cents a share. Bloomberg's Edmund Lee reported that analysts had expected just $0.17 cents.

Not much was said in the earnings release about the progress of Project Devil, AOL's more "dynamic" interactive brand-friendly display ad offering, though details should emerge during the earnings call. In the meantime, here's a rundown of AOL's advertising performance in Q1:

-- Global advertising revenue was up 5 percent, reflecting double-digit growth in the third party network and growth in international display, partially offset by declines in search and contextual revenue.

-- International display ad revenue was driven by continued growth in both the U.K. and Canada.

-- Domestic display advertising revenue declines were pinned on falling reserved impressions sold, though AOL says it was offset by some gains in reserved inventory pricing and  advertising from AOL's local news network Patch. Again, there were no specific dollar amounts regarding that business unit's performance beyond some percentage numbers that said Patch grew traffic and advertisers over 40 percent year-over-year and revenue over 100% year-over-year.

-- Third party network revenue increased $20.8 million, reflecting 14% growth in Advertising.com and $2.4 million related to one month of additional video dollars coming from goviral, which was acquired in January  2011. Advertising.com growth reflects an increase in advertisers and publishers on the network and increased sales of premium packages and products, the company said.

In a sign that international is doing the heavy lifting these days, third party network revenue also reflects $6.4 million related to Ad.com Japan, a Japanese joint venture which AOL began consolidating during the quarter as a result of acquiring a controlling interest in the property by increasing its ownership from 50 percent to 53 percent and gaining control of the board and day-to-day operations.

-- Search and contextual revenue trends continued to struggle, though the declines were arrested a bit. That segment's revenue dropped $6.2 million year-over-year, primarily due to a 14 percent decline in domestic AOL-brand access subscribers and fewer queries from co-branded portals and international markets. Search and contextual revenue declines were partially offset by continued growth in search revenue on AOL.com. 

During the call, CEO Tim Armstrong expected $40- $50 million in revenue for the year. In response to questions from Citi Investment analyst Mark Mahaney about Patch's prospects and display performance in general, Armstrong said that "we've done a really good job of bringing the cost structure down. At a very base level, it remains a core value proposition and we've only started ramping up the sales force last March. We have a whole bunch of products coming out that will help keep down the cost structure."

Updated: On display, after acknowledging the declines, Armstrong told analysts, "Our team did an excellent job on four out of five revenue streams and I was not happy with the domestic display over the course of Q1. We see the pipeline improving and we have a more structured approach which is more data structured. The reason it wasn't where we wanted in Q1 was that the strategy wasn't tuned and we've addressed that and become more focused around  [key performance indicators]. We've moved away from the old display and towards the new display, which is heavily built around video."

In addition to mobile, Armstrong noted that for most clients, advertising on smartphones and tablets are still in the experimental phase. To try to move beyond that, AOL is working on ensuring that support for video is there and that Project Devil for mobile is expanded.

Speaking about video later in the call, Armstrong described the newly minted video hub AOL On as a curated video showcase that occupies a large space between YouTube and Hulu. "When you think about video advertising in the future, there will be a lot of performance-based buying on video and videos targeted to users at a particular time," Armstrong said.

By David Kaplan

 

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