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.
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.
Things were looking bleak for Yahoo! Inc. (NASDAQ:YHOO) before the new CEO Marissa Mayer took charge of its operations. Her insistence for better user experience led to number of changes in Yahoo! products like Yahoo! mail, Yahoo! search, etc. It is expected that under the guidance of Marissa Mayer, who was formerly a VP at Google, Yahoo! will gradually pick up market share, which it has been losing to other stronger players, including Google. In February, Yahoo!’s share price hit a new 52-week high, and analysts are expecting that it will continue to rise as a result of efficient management and product innovation.
The Bottom Line
I began this article by mentioning the big news for AOL. Though there are certain grey areas when we carefully analyze the performance metrics yet, these results hide it very well. Going by what the top management of the company said, AOL is back on the growth track and is poised to grow in the coming years on the back of increasing revenue from search and display advertising, as well as ad platforms like Devil. AOL CEO Tim Armstrong also admitted that Patch fell behind projections and promised to make efforts in bringing Patch towards profitability.
HuffPost Live is an excellent example of AOL’s efforts on the product innovation front. To quote a couple of numbers from the earnings call, HuffPost Live garnered around 128 million video views in just six months, and was also named the Biggest Innovation in Media for the year 2012 by Mashable. AOL is moving forward on strong fundamentals of audience and revenue growth, a vigilant cost management system, and product innovation. All in all, AOL deserves to be included in your portfolio at its current price.
The article Is AOL Set For a Journey of Growth? originally appeared on Fool.com and is written by Mihir Mehta.
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