What to Expect When AOL Reports Earnings

AOL is shifting from subscriptions to video advertising. Can revenue continue growing?

Feb 4, 2014 at 7:00PM

AOL (NYSE:AOL) will report its fourth quarter earnings on Thursday. As subscription rates continue to decline, the company has shifted to a media technology company. Its biggest focus in recent years has been video, where it competes with Google (NASDAQ:GOOGL) and Yahoo! (NASDAQ:YHOO).

Last quarter, the company acquired Adapt.tv, which allowed it to boost its valuable video ad inventory. Since then, the company has made several moves to shed loss-making ventures and bolster its advertising business. Let's see what we can expect from AOL when it reports earnings on Thursday.

Stats on AOL

Analyst EPS Estimate

$0.60

Year-Ago EPS

$0.41

Revenue Estimate

$655.81 million

Change From Year Ago Revenue

9.4%

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance

Adapting its earnings
The Streets earnings expectations have remained flat since AOL's last report, although several notes have driven the stock price up over 26% since then. Meanwhile, the S&P 500 has been flat.

For the third quarter, AOL reported better than expected revenue of $561.3 million where the Street expected $548.8 million. The company missed earnings expectations, however, reporting just $0.02 per share. The company's acquisition of Adap.tv contributed significantly to the revenue gains despite less than one month of operation under AOL.

The Adap.tv acquisition should generate a significant portion of AOL's revenue in the fourth quarter under its first month of operation. AOL leapfrogged Google on the back of the video advertising platform to become the No. 1 video ad display company in September. It's maintained that position in October, November, and December as well. Google maintained its position as the most popular video platform, however, while Yahoo! trails AOL.

Yahoo! too has focused on video since Marissa Mayer took over as CEO. The company operates similarly to AOL, and both see video as an opportunity to increase ad revenue and inventory. Its no secret that online videos represent a growing advertising opportunity, and eMarketer expects the online video advertising market to grow from $4.12 billion in 2013 to $9.2 billion in 2017.

Recent developments
AOL made several moves last quarter to bring some of the web's best content to as many viewers as possible. It partnered with ESPN to provide clips from its award winning shows. Additionally, it partnered with Roku to bring more of its content to Roku set-top boxes.

Moreover, AOL made moves to shed some weight. CEO Tim Armstrongs side-project Patch has weighed on AOL for years now as the hyper-local news network continually took losses. The company finally sold a majority stake to Hale Global last month. Additionally, AOL is reportedly in talks to sell its WinAmp media player and streaming service ShoutCast to an unnamed buyer. Although these moves won't affect the company's fourth quarter results, we should see the impact on management's first quarter guidance.

Last month, AOL agreed to acquire Gravity, a web-targeting company that focuses on personalizing the web experience for users. The company may allow AOL to better target ads, and thus increase its ad prices. Company's like Google and Facebook, which have significantly more information on their users, are able to charge more than AOL and Yahoo! for that reason. Again, this won't show up on the company's results, but look for an impact on its guidance.

What to watch for
When AOL reports, watch to see what affect Adap.tv has on the company's overall revenue. As ad inventory expands, AOL's cost of revenue should climb too, so watch to see the impact of Adap.tv on AOL's margins. The company should give guidance on how it plans to mitigate those costs going forward including it recent sales of underperforming assets like Patch and WinAmp.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Google and Yahoo!. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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