That means Tim Armstrong has delivered a beat for the first time at AOL. (He missed the last two quarters.)
Analysts were looking for $0.50 EPS, but AOL had reported a diluted EPS of $0.93. Thanks to controlled expenses and selling certain properties.
Net income for AOL was $171.6 million, up 132%, but that’s because of gains on the sale of Kayak and ICQ.
Ad revenue at AOL continues to tank. It was $292.8 million for the quarter, which is down 27% year over year. On the plus side, this is actually better than what Barclays analyst Douglas Anmuth forecasted. (He was looking for -29%.)
Here’s the exact breakdown of the ad business:
- Display was $120.8 million, which is down 14%
- $112.5 million of display was domestic, which is down 8%.
- $8.3 million of display was international, which is down 54%.
- Search and contextual was $99.2 million, down 28%.
AOL explains the drop in domestic display as such:
Domestic display revenue declines of $9.3 million reflect a slight decline in premium inventory sales as well as less AOL Properties inventory monetized through our network, resulting primarily from our efforts to improve the consumer experience.
Sounds like they partially couldn’t sell ads, and partially are removing ads from their sites.
The subscriber business generated $244.8 million in revenue, which is down 26%.
AOL also says it paid $97.1 million for 5 Minutes, TechCrunch, and Things Labs last quarter. And $23.1 million could go to those companies if they stick around for the next three years.
At 8 AM we’ll listen to conference call with investors and take notes here. So, tune in. Unless it’s in quotes, it’s just a paraphrase. The call is now starting. CFO Artie Minson and CEO Tim Armstrong are on the line…
8:03: AOL just announced that Curtis Brown and Erynn Petersen are a part of the technologies leadership team.
8:04: Tim: At a global level, we’re happy. Still a lot of work, put we’re working hard on the company.
The strategy — the long term vision, sig oppty behind it. 3 buickets — distribution, a highway of distrbution, AOL.com and email, offer distribution. Second area is search, social networks and other high scale forms. First part is to get that distribution correct from healthy growth of users. We just relaunched AOL.com. We have months of improvements.
Next part is content exits — exits off the distribution. We are putting together sizable areas of content.
8:06: We now have TechCrunch and Engadget, they will be significant exits. We also have Patch, which is local. A range of exits off our distribution. We are looking at ad models.
8:07: Third part of strategy is the platforms — content management systems and the ad systems. We continue to spend time on these, continue to rebuild them.
If I wrap our strategy, it’s continue growth and distribution, continue growth of platforms.
8:08: Now, dig into Q3. At beginning, a choice, how fast to push recovery. We jumped out of bed put on sweats and went straight to gym. The summer sprint, to get the company on offensive.
8:09: Here’s some work that was done — Project Devil, new ad system. Designed/tested and launched homepage. Launched a video player grew playbacks by 11X. Surpassed 100 million video streams, up 100% y/y in video views. We started tagging original journalism. AOL travel relaunched, including 4,000 editor picks. We had 5,000 photos sourced through seed. Patch in 133 towns in Q3. Launched Cambio with Jonas. Ended with 2.8 million UVs in tween demo. Signed 20 other similar partnerships. Created many topic pages. Recreated Car research. Moviefon was redesigned, increased traffic by 10X. Increased production of Seed. INcreased production on StudioNow. Relaunched MapQuest. Relaunched Mapquest UK, Germany, and Italy. Also on iPhone and BlackBerry. Added it to Ford. Adtech released new video product. Two new AOL subscription services. Launched and redesigned many other things…that’s a partial list. First time AOL full focused on playing offence.
8:13: AOL brand ranked top 50 of brands people are attached to.
8:14: Homepage pricing was up and revenue grew year over year. Overall product and ad strategy is working. On salesforce front, rebuilt, upgraded talent. Expect to continue adding talent. On business development and M&A front, we got many positive developments. The 5Min property.
8:15: TechCrunch, one of the best tech properties in the world, with a great team. Thing Labs, come in and work on AIM. We attracted some talent entrepreneurs. AOL Ventures made 3 investments.
8:16: Our biz dev was able to close Google deal on better terms for both companies. Good deal for AOL and Google.
8:17: A net import of talent. We continue to get better and better talent. Added two senior executives. As we look ahead, not changing expectations — Q4 will be bumpy. We would expect 2011 show the signs of the turnaround. Second half of 2011, I would personally be disappointed if we’re not at industry growth levels.
8:18: My personal list: Execute against stategy. organise content into profitable groups. Including video. This year is profitability on a brand by brand basis. 3. Lock down the ad pipeline, scale ads. 4. Scale AOL local. Interesting things happening in local. We are going to be an investment company in those areas. 5. From a culture standpoint, make AOL the best place for smart, hungry, creative talent. We are making this culture where people want to join.
8:20: Now, here’s Artie Minson who is 40 as of last week..
Artie: Look at page 6 of slides to understand Y/Y comparisons. While ad sales are down, approximately $62 million is thanks to initiatives we implemented.
8:22: As we have discussed, restructuring of sales force means smaller pipeline. Our sales people are hustling. We couldn’t close the gap though.
8:23: As we look at Q4, display revenue to decline because pipeline still stuck. Renewed Google partnership, should yield a better experience for users when it kids in on Jan. 1.
8:24: Operating expenses were $405 million, down $138 million y/y and flat to Q2. Relates to reduction in TAC, and drop in personel costs. But, investment in local lifted OP EX. We expect Op EX to increase in Q4. Much will come in cost of revenue, local is a $30 million per quarter cost.
8:25: 5 things to point out — 1. Resilience in access business. Continued moderation in churn. 2. Continue to unlock value by shutting unused assets. 3. We made 3 acquisitions. All three are right in our sweet spot. Also, similar to StudioNow, we incentivise them to stay here for 3 years. 4. AOL continues to generate substantial amounts of cash. 5. Our cap expenditures are $68 million, we expect to come in at the low end of the previous guidance of $100-125 million for year.
8:28: Q&A…Domestic display will be down in 4Q, could we see y/y growth decline, around 9%? Tim, can you talk local?
8:30 Artie — hard to predict where Q will come out. As you pointed out, it’s a tough comp. Team working incredibly hard to close the gap in the first number of quarters.
Tim — on local front, we have kept track of Google Places pages. If you look at our strategy versus Silicon Valley, our strategy is build around community. The scraping of content to create aggregated pages benefits Google, but what we’ve seen in local, the community is helpful. We have a differentiated strategy. Is it going to hurt us? I dont know. We’ve done a good job of building Patch without Google. We understand distribution with out Google. I dont think Google Places are a detriment to Patch.
8:32: Tim — We believe video is important. Highest revenue growth area. Very significant oppty. We’re working on production deals. We plan on scaling through StudioNow. We expect consolidation in the ad network space. You’ll see a verticalized strategy from Ad.com. Then, the DSP space whcih is run by agency. There’s technology, but not as sophisticated as our technology. We saw a back and forth on that. Agencies interested, but they’re missing the technology. We expect ad.com to be more signification in that space. You have to hustle to get verticalize and get into the DSP space.
8:38: Are you constrained on acquisitions still? Remind us of monetization around Patch, when is it material?
Artie — the $100 million acq cap. We don’t have that cap anymore. No cap. In terms of where we will focus, they things you saw us do in the 3rd quarter, those will continue to be sweet spot.
Tim — No haily mary passes. Any acquisitions must involve significant talent that will stay. They must be passionate. We will continue to do tech tuck ins on the platform side. We will use cash and stock.
8:41: As for Patch…over time, Patch investment over next 2 years, then we’ll have more meaningful monetization. Looking at different strategies.
8:42: You would be dissapointed if you don’t grow in 2nd half 2011, we expect mid teens growth?
8:42: Tim — I blieve our sales force is getting ultra organised. Down to acct level, we know our clients. That’s table stakes. 2nd thing, is ad products we are focused on scaling making our targeting, project devil. A number of other ads products. Hopefully at scale next year and meaningful drivers. The ads platform. We have project fusion, which gets our sales force and other teams to work together, will roll out 1st half next year.
8:44: A lot of changes to to the business were self inflicted. Next year, hopefully it grows. Our teams under pressure to make sure we’re ready for 2011.
8:45: Artie — Q4 pipeline is down, we start in something of a whole like other quarters…
Tim — Project Devil, we drastically increased content on sites, removed ads. but project devil puts ad funnel from awareness to interaction. Results led to stronger interaction with ad. 68% more likely to buy product seen in the ad. People stay on the pages 22 seconds longer. Devil 8X better than a normal ad banner. Overall, net net better ad experiences. Very high engagement from creatives.
8:48: Can you speak to new Google partnership?
8:49: Tim — better product for consumers, better ads. On the product experience, AOL has a sub par search experience. Second thing on monetization, monetization of individual queries is improved. Google improved search ad products. Check box on consumer experience. Check on ads. Mobile search is in this deal. Google does a very very good job with mobile search. And next piece is YouTube. We make high quality content, so quality video is good for YouTube. YouTube wasn’t in last deal. International is part of this deal too. net net, very positive overall experience.
8:52: On search, how you think it will be in 2011?
Artie — decline in query share, thanks to decline in access business. We are excited about search product, but as access declines, so does queries.
Tim — on engagement, we are down rough on a y/y basis. Engagement is fixing the properties and adding properties. 3 concepts — first and first most — what do you show to a user? We realised our designs, we weren’t beating the internet in terms of design. Second piece, how do you produce, and release content? We made big gains in what our CMS can do. We’re in final process of having one CMS. AOL employees and partners need to use that friendly. It’s optimised for search, Facebook, Twitter. Last piece is distribution. We’re focusing on healthy distribution.
8:57: We have a strategy — main part, I want to be clear — 80 -80-80 80% of domestic purchase are done by head of houshold or women. 80% still in local areas. 80% of considered purchases are influenced by somebody, so we focus on influences. Put the filter of 80-80-80 on everything. That would give you an idea of what exits we’re focused on. TechCrunch and Engadget are big influencers. We’re building a big exit around technology.
9:00: As for Google display, at a high level. We are concerned and focused for us to gain, we have to capture higher share, there’s more display dollars moving in and we have to capture them. The same thing we talk about internally. Google and Facebook are doing well, they have data and flywheel set ups. Google has a verticalize strategy. AOL wants to be competitive with Google and Facebook, not people further down the chain. We want to run an aggressive ad system here which is attuned to being a champtionship level. Google and Facebook are taking share, doesn’t mean we can’t. We are “hellbent” on getting there.
9:02: Artie — On Dulles campus, moved all employees are moved to west side of the road. No plans to do any type of sale/lease back.
9:04: Tim — I’ll just end w. 5 bullet points. Maniacally focused on execution. Look at how much we have done in the year. 2. Internal and external — high expectation for consumer — we want magical experience for consumers — underline magical. 3. We need to focus on ad sales compete with top people. 4. We will continue to acquire taletent. 5. My personal money is invested, I can as much, probably more than you do. Turnaround, clock is on the field. We run high pressure, fun environment. We want to add value to consumers and advertisers. AOL as an investment vehicle if you believe in internet and content, AOL is a great long term investment, not a great quarter over quarter investment. Thanks to all for joining…
Here’s the earnings presentation slides:
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