AOL: Trying to Redeem itself

By Vinayak on Wednesday, September 4, 2013 with 0 comments

During the dial-up internet era, AOL (NYSE: AOL) was a king in its own right. It is interesting to note that dial-up internet business is still a large source of the internet company's profits. Profits that AOL has poured into making it an online content company with a chance to bring in more advertising revenue. This is obviously a good more given that we are moving into a period where content is going to be king and the flourishing online ad market might be the next gold rush.

There will also be an increased demand for faster internet speeds (Google Fiber, etc) as indicated by the fact that dial-up internet use has been falling over the years. AOL's dial-up internet revenues dropped $400 million over the last 3 years.

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The company has attempted to get new membership programs to customers online technical support, anti-virus software, computer tools, maintenance and warranty services, identity theft protection, online and social media privacy and even reputation monitoring services.

As I mentioned earlier, AOL has been revitalizing its content segment of business and it has quite an eye-catching list of websites. There is of course and then The Huffington Post. TechCrunch, Engadget, DailyFinance and AOL Travel have been quite the success. Other notable brands in the segment include AOL Autos, AOL Travel, AOL Music,, Patch, MapQuest, Moviefone, Cambio, StyleList, Kitchen Daily, Homesessive, and Makers. Most people would agree that this is the most interesting part of the AOL business.

AOL is also quite big in the advertising networks avenue with sites like -the foundation of AOL Networks - and goviral which is a global online video distribution network. Then there is AOL On which is a platform of AOL's complete video offerings. It also has a curated video hub for consumers that provides premium video via a diverse set of channels that can be viewed on PCs, mobile devices, tablets  and connected TV devices.

Sponsored Listings is another notable name in the AOL Networks segment and it lets advertisers to target text-based and text plus image-based ads on Brand Group and Membership Group properties and within the Third Party Network with a great amount of influence over ad placement.

Restructuring of the hyper-local news business Patch

Patch has been problematic for AOL ever since the Web Services company took it over. There were 900 hyper-local sites in all that were acquired by AOL in 2009 for $7 million. So far, Patch has proved nothing more than a white elephant for AOL's business with more than $200 million in losses and a weak performance. Some shareholders wanted AOL to give it up. In the recent quarterly call, AOL management announced a restructuring initiative for Patch. And so 400 local sites will be closed. This will ensure that AOL's brand segment returns to profitability by 2014.


Adap.TV Acquisition

There was more in the last quarterly call and this time it was some encouraging news as management announced the acquisition of Adap.TV for $405 million. Adap.TV is one of the leading programmatic video platforms on the Internet. This is a nice way to step up the game in online, video advertising. As more consumers watch video over the Internet, this acquisition could translate to higher earnings for AOL over the long term.

Adap.TV competes with YuMe Inc (YUME) and Tremor Video Inc (TRMR). It is the only complete global programmatic video stack for publishers and advertisers across all screens. Additionally, it has a unified yield management platform for advertisers and publishers that is great for planning, targeting, ad-serving, and measurement.

Adap.TV is also one of the fastest growing platforms on the web, with worldwide revenue growth going over 100% annually in the last three years.  This gives immense value to AOL as there has been wide adoption by the biggest global advertisers and publishers, including 83 out of the Ad Age 100 and 70 of the comScore 100. In addition, AOL gets a highly skilled and driven team that is driving innovation in the automation of worldwide video advertising.

Bottom line: Look for AOL to keep making acquisitions

It does appear likely that AOL's revenues will keep growing. There are definite risks that emerge on the horizon with main one being the continuously loss-making Patch brand category.  The other possible red flag would be increasing revenue declines in the membership segment. So any lack of growth in the video advertising segment could hurt the stock pretty badly.

Nonetheless, the Web Services company has many catalysts with the stabilization of the Membership division revenues being a likely propelling event. Another big boost could come in the form of a successful restructuring of Patch and a well done Adap.TV integration. If the Huffington Post acquisition keeps playing out the way it has been so far we could see AOL make the transition from internet service provider to content manager/ad company that much faster.  Anyway, the accelerated share repurchases has value investors excited.

Source: AOL 10-K

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