Although the company reported 13% overall growth in revenue year-over-year in the fourth quarter, growing from $599 million to $679 million, AOL noted net and operating profitability was affected by a "pre-tax restructuring" that cost it $13.2 million. This was largely due to AOL's sale of a majority stake in local news platform Patch to Hale Global.
Additionally, cost of revenue climbed $70.5 million year-over-year, stemming from expenses associated with its $405 million acquisition of Adap.tv as well as traffic acquisition costs around third party network revenue and search marketing. Earnings per share were slightly lower than analyst estimations, coming in at $.43 a share.
However, quarterly global advertising revenue was strong, as Armstrong cited a 23% increase in revenue, growing from $410.6 million in Q4 of 2012 to $507 million in 2013. Global display revenue was up 7%, clocking $181.7 million for the quarter. However, search revenue was down 2% at $101.7 million due to fewer queries on the AOL client and subscriber decline.
Ultimately, Armstrong said AOL's advancements in automated video and programmatic advertising are "paying off." The company cited 63% growth in third party network revenues, primarily driven by the sale of premium programmatic formats along with Adap.tv, to $223.6 million. Armstrong cited a "surge" in last-minute deals in third party network display, owned-and-operated (O&O) and programmatic inventory at the turn of the year. This surge, however, was anomalous. Armstrong stated that AOL doesn't typically rely on last-minute deals, though he extrapolated such late activity shows "AOL Networks' full-suite for publishers and advertisers is gaining momentum."
AOL's CFO Karen Dykstra, also on the Q4 call, added: "We have a very full stack platform in AOL Networks and we are continuing to invest in that internationally with programmatic TV and AOL On."
Additionally, mobile and cross-platform planning are huge areas of concentration moving into 2014.
"Roughly 55% of clients ran cross-platform campaigns" in the last quarter, Armstrong said, which cuts down on silos in the sales process. "Advertisers don't wake up one day and say, 'I want to do mobile advertising.' They say, 'I want to reach customers at the right time on the right device.'"
During the Q4 earnings call, Brian Pitz, managing director at securities and investment banking firm Jefferies & Company, asked Armstrong to elaborate on AOL's ongoing video strategy. Armstrong compared it to a pyramid structure.
"At the top, we have Slate and HuffPostLive and in the middle, we have AOL On, which I believe is the largest syndicated network of high-quality content with about a million pieces of video from many cable companies and big partnerships with brands like ESPN to distribute content," he said. "And on the bottom is our marketplace, which connects buyers and sellers, which is Adap.tv."
In mobile, "we are screen-agnostic," Armstrong added. "If you look forward, one of the reasons we made a big investment in video is because the infrastructure around mobile is going to change pretty dramatically over the next 12-18 months where you're going to go from singlecast to multicast and that will have a big improvement on mobile video for consumers, network companies and ours." Although mobile and video is big and growing, it's only a "fraction" of what it will be over the next few years.
"We have the infrastructure and people getting integrated between Web video and TV, so we're very interested in this business and have a clear and precise strategy around it."
Ron Josey, a managing director focusing on the Internet industry at JMP Securities followed up that point with a question about AOL's pricing on its O&O sites, premium formats and the bigger picture on programmatic. Armstrong said pricing overall in advertising is likely to get more expensive over time due to increased consumer adoption of digital devices.
"When you zoom into a business like ours, big brands want to do customer acquisition and have their brands next to big brands and they're very choosy about where they put their brands and the pricing of how they acquire customers," Armstrong said. Publisher networks are doing "private marketplaces, but I think there's still this overall notion on Wall Street and Madison Avenue that programmatic's going to destroy pricing."
In addition to private marketplaces, Armstrong said: "You essentially have an options market start to develop also, so you have to remember there's a giant tailwind of consumers going digital, a giant tailwind of businesses needing to chase those consumers, the consumers will get more expensive to convert and then the mechanisms underneath -- the piping and private marketplaces -- are gearing up to extract the most value per consumer. That's why you'll see that in other businesses across the board."
AOL's differentiation, he added, is its ability to offer a global supply and demand connection point, along with a means for open data. One advertiser, he said, is running 30-40% of their ads in private, programmatic marketplaces and the results look "very similar to non-programmatic areas because they're buying high-quality inventory at scale. I think marketing's going to get more expensive and private marketplaces are going to get people better results and they're going to pay for better results."
Apart from AOL's mobile, video and programmatic push, Laura Martin, a senior analyst for the entertainment, cable and media industry at equity research firm Needham & Co. asked how AOL will integrate its latest acquisition target, multiscreen content optimization and personalization platform Gravity, into its broader stack and if the eventual result will mean higher pricing on ad units.
Armstrong said Gravity, if combined with a tool like AdLearn, could enhance the targetability both on video and premium formats in display across AOL O&O sites; there could be pricing and traffic improvements, as well as overall network effect benefits.
"The easiest way to think about Gravity is as there's programmatic advertising on the ads side, Gravity allows programmatic delivery of content at scale. The ability to serve very deep content wells in a very personal way to consumers, and improving the chance of getting right content to right user has massive economic benefit.
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