AOL’s ad revenue (TWX) grew 2% year over year–bad, but not cataclysmic, especially in comparison to the weak growth at Yahoo. That said, operating income continued its plunge, as as result of an important (and negative) revenue dynamic everyone should be aware of.
AOL’s third-party ad revenue (ad networks) grew. Display ads on AOL properties, meanwhile, declined again, just as it did in Q1.
The trouble here is that AOL’s third-party revenue is far less profitable than its owned-and-operated display revenue. This is in part why AOL’s EBITDA dropped so precipitously year over year despite the firing of about 2000 people last fall. (The press release cites “higher traffic acquisition costs” as one reason for this. These are the revenue share payments that AOL pays out to the sites it sells ads for).
The other strong point in the quarter’s ad revenue was paid search. Any growth here is likely temporary. As Google gains more and more share of the search market, we expect AOL’s query share will gradually trend toward zero.
Time Warner also said it has finished separating AOL’s access and content businesses. So we’d love to see the numbers. rumour has it that the dying access business still contributes the lion’s share of the company’s profit, meaning that the margin in the content and ad business is very low. This will make a big difference in the value Time Warner could get for the ad business if/when it sells it off.
Time Warner’s Q2 conference call begins at 10:30 ET. We’ll be providing live analysis and commentary here. Thanks for joining us!
10:32 ET: Hold music. Cellos. Flute.
10:33: Call starts
IR Head Doug Shapiro: Reminder: Nothing we say can be used against us.
Goal to create, package, and distribute content: TV, movies, magazines, anywhere content goes in world.
- right businesses / structure
- improve performance
- manage balance sheet
Structure: Substantial progress! Dumped cable. Expect to close around year-end
AOL: Separated access / audience
- access, audience, and a shared services group (important detail)
- should enable us to run separately IN 2009
- Can now do something strategically (i.e., sell) either
This is important, but the real key is the financial performance of each business. Until we see how much of AOL’s profit Access generates, very hard to put accurate value on AOL’s content business.
Turner, CNN ratings doing OK. Original programming strategy making progress: The Closer, Saving Grace. This is working.
Lots of quasi-irrelevant details about specific TV shows.
Warner: Bragging about The Dark Knight. Our studio rocks. 8 of top 15 top-grossing films of all time. Consistently. Yes, Speed Racer sucked, but we usually get it right. (Credibility-building admission!) Going to keep exploiting comics, TV. Sex and the City. Get Smart. Star Wars Clone Wars. Also leading in Blu-ray and VOD. Now that we have embraced Blu-Ray, sales accelerating. Every release will now be on Video on Demand “day and date”. Lego Indiana Jones and Lego Batman rock, too. Games will be increasingly important.
Time Warner Cable. Good RGUs (revenue generating unit) growth
AOL and Publishing behind expectations.
AOL: pageviews up 6%, powered by content verticals (+60%). Network delivered solid growth even in crappy environment. Display down 14%. Pullbacks autos, financial services, travel. We didn’t expect to reverse these trends in Q2. We’ve made good progress this month. Tacoda and Quigo now integrated. We think we’ll see benefits in second half.
Publishing: Also behind targets. Time Inc hammered by advertising enviro. Pharma, auto, cosmetics, fin’l svcs. Ad revs down 9%. Online growing rapidly, but doesn’t offset. Uniques up 30%. Mag readership strong: double rest of industry. Continue to fire people, Don’t know when will turn, but well-positioned when it does.
Balance Sheet: We will buy some stuff, but only in disciplined way: Higher ROI than alternative uses, including buying back stock. This is a high hurdle given lousy stock price. We think stock extremely attractive, but need our cash right now. Time Warner Cable will pay us $9.25 billion in spinoff. This will give us cash to buy back. How will we use? We want you to know, we will continue to be disciplined.
Going through slides. If you factor out all the stuff that didn’t do well, we did well.
Free cash flow above $1 billion last eight quarters. Reaffirming outlook (this is impressive considering economy). 7%-9% OIBDA growth, heading for low end. We expect 2H growth rate to improve. (wishful thinking?). Reaffirming free cash flow and EPS.
Net debt flat with Q2, down $1B year over year (free cash offset by dividends, acquisitions).
TV: Scatter market pricing still strong (surprising)
FILM: Dark Knight a Q3 event. (gonna be huuuuge)
PUBLISHING: ads down 9%. firing people as fast as we can. Ad visibility limited. Current Q3 is below Q2.
AOL: Same as last q. Access sub losses moderated. Q2 OIBDA is low-water market. Up from here.
- Display down 14%, 191mm. More units, lower CPM. Away from guaranteed to remnant. This due to market and integration problems.
- Paid search up 10%
- Platform A up 15%, includes acquisitions (40mm), Apollo (-43mm)…organic ex Apollo up 26%.
Access: smallest sub decline since free. 647,000 lost. (This is very good: Business will stabilise soon). OIBDA should improve balance of year.
Corporate expenses: Down 13%. Cutting $50 million of cost this year.
Can do anything else with Access besides selling to Earthlink? Yes, operating and seeing if cash flow better than what we can get with it. [This is reasonable: business will continue to throw off cash]
What are you going to buy? Would tell you but then we’d have to kill you.
Home Video: Are retailers cutting shelf space? No. Retailers cutting music, not DVDs. Our sales up 6% this year, industry flat. We think market up modestly next year on high-def. Also, as move into VOD, margins better. So we think earnings can go up. And we’re just kicking our competitors’ asses.
AOL: Why didn’t AOL ad revenues improve when you said they would? We look at usage as leading indicator. Some of patterns in key areas. Platform A successful [but much lower margin]. Yes, we did expect to improve and it didn’t much. We will benefit from easier comparisons.
AOL acquisitions: Are these all dogs? What is ROI? Bebo: we’re going to integrate and take advantage. But we’re not going to reveal our secret plans. Value of Platform A in today’s market is VERY SIGNIFICANT. At-scale network platform.
Video games. Explain, please: Establishing ourselves as a distributor. Also using film-type financing to spread risk (Abu Dhabi). We acquired maker of Lego games. Small interest in a couple of others. Abu Dhabi providing $250 million to fund games next few years. Co-development. All focused on getting to scale and distribution. Can we attract talent? Yes.
AOL premium to remnant shift…how much left to go? Difficult to say. Hard to know market vs. our own mis-execution.
Any concern about rising TAC? No, as per cent, consistent at about a third. [This is lower TAC % than would have expected. Google/Yahoo much higher.].
News Corp concerned VOD will cannibalise DVD. What are unit economics? How can “day and date” be more profitable? We haven’t seen cannibalization. Margins higher by a lot (on rental). We think will increase margins and profits when go day and date. Should help on privacy. We beat everyone else in DVD performance because we went to scale early. We think News Corp. wrong.
Affiliate negotiations coming up soon? We don’t discuss, but feel fine.
Upfront? We were at top end of universe, CPMs up high single digits. Ahead of universe. Sold same amount of inventory. Scatter is moving up from upfront. Not as much as in q2, but up.
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