Is AOL, Inc. (AOL) Set For a Journey of Growth?

Shares of AOL, Inc. (NYSE:AOL) went up by 7% after it released its Q4, 2012 earnings earlier this month. The fact that Q4 revenue grew year-over-year for the first time in the last 8 years seemed enough to generate significant optimism amongst investors. AOL delivered strong results for Q4 on the back of a substantial increase in global advertising revenue. This growth mainly came from a growth in revenues of the third party ad network, which did not seem encouraging to analysts.

Revenue from the third party ad network increased by 31% to $137.2 million, causing some apprehension amongst analysts as sales made on behalf of other publishers are volatile and difficult to be forecasted for the coming quarters. However, as far as I am concerned this is not really a point of worry as third party ad sales are an integral component of a digital advertising portfolio, and, like other network properties, contributes to the overall revenues of a digital media company. Additionally, the double-digit growth at AOL.com testifies robust performance of AOL network properties. Something that AOL needs to work towards is more global display revenue, as display is going to be a big bet in the world of digital advertising in the coming years.

AOL also changed its definition of adjusted OIBDA to exclude special items so as to give a true and fair view of the state of affairs. AOL has focused heavily on managing its expenditure with the help of proper cost management mechanism, delivering OIBDA at $123.3 million. Effective cost management will help AOL gain further competitive advantage and higher market share in the coming quarters.

This result has definitely shown an improvement in performance of AOL, and as management mentioned, put the company back on the growth track. However, I am still not strongly convinced with regard to the sustainability of strong performance metrics, and my skepticism hovers around increasing cost of revenues and an unequal rise in advertising revenues. Taking this quarter as a case in point, the cost of revenues increased by almost 8%, which is twice the rate of growth in revenue. As an investor, I would not be very pleased with these numbers and would anticipate suitable strategies from management to expand revenue further.

Industry peers

If I were a risk-averse investor and wanted to try my hand in the digital advertising industry then my probable choice would be Google Inc (NASDAQ:GOOG) . The company reported robust results for the fourth quarter, with a GAAP net income of $2.89 billion compared to $2.71 billion in the fourth quarter of 2011. As for the entire industry, Google’s traffic acquisition costs also increased to $3.08 billion in Q4 2012, as compared to $2.45 billion in the fourth quarter of 2011. Notably, Google is investing substantially in its display network, as well as Android and Youtube, as display ads will occupy a good portion of an advertiser’s marketing budget in the future.