AOL Display Dollars Demonstrate More Progress, If Not Greatness

Tim Armstrong AOL CEO 2Aside from the big news that AOL was acquiring video-ad marketplace to further its programmatic goals, the portal reported its Q2 earnings, which showed continued strides on its display business. While the single-digit gains made during the period may not seem too exciting, they do compare favorably with the recent earnings from Yahoo and ValueClick, two former display bellwethers that saw their respective display sales decline in the quarter. Read AOL’s earnings release.

Overall, AOL revenues were up a mere 2%, while global advertising increased 7%. In the US, display’s growth still seemed anemic, rising just 3%, while international display, after years of lagging due to a massive restructuring, grew 19%. Lastly, the third-party network, which has been the primary growth driver the last few years while brand advertising on its owned and operated sites struggled, rose 9%.

Those numbers — good, not great — show why buying for $405 million is happening now: AOL needs to ramp up its programmatic capabilities quickly across the board, but most importantly in video, the fastest-growing segment of display advertising.

“When the acquistion is completed, we will have a combined 140 million unduplicated video viewers — second only to Google,” said AOL CEO Tim Armstrong at the start of the Q2 earnings call.

Other highlights from AOL’s Q2 included:

  • Video views grew 40%;
  • Project Devil, the showcase of its dynamic display products, saw ad impressions grow 30%;
  • Net income was $28.5 million, though comparisons to Q2 2012 are skewed by the $1.1 billion patent sale to Microsoft during that quarter last year;
  • Cost of revenues increased $3.7 million year-over-year driven by a 17% increase in Traffic Acquisition Costs in search marketing-related expenses;
  • Reducing the investment in its hyperlocal news venture, Patch;
  • AOL Networks, the rebranded Group, was negatively impacted by the absence of revenue from the divestiture of StudioNow in Q1 2013. StudioNow contributed $3.2 million in revenue to AOL Networks in Q2 2012. To a lesser extent, AOL Networks’ revenue growth was impacted by a decline in revenue from the sale of Brand Group and Membership Group inventory through AOL Networks, as more of that inventory was sold on a reserved basis than in Q2 2012;
  • revenue grew 100% with $75 million in sales in 2012 and “almost break-even” EBIDTA.

During the Q&A part of the earnings call, Jefferies analyst Brian Pitz put the question to Armstrong: There are a lot of video companies in the space. Why

Armstrong cited three reasons: It’s a “true technology company, engineering-led and driven,”’s growth rates of 200-300% were higher than other companies’ in the space and it has a talented team.

“If I would have had to pay for out of my personal bank account, I would have paid it,” Armstrong said.

Analysts pressed Armstrong on whether the shift to programmatic would put more pressure on display prices. Secondly, much of the growth in video advertising also appears to be coming more from traditional display banner business, rather than new money coming into online from, say, television advertising.

Armstrong, who began the call with a clear defense of programmatic ad sales methods, reiterated his point by saying that as software for media buying gets better, and the ability to show advertisers the value they’re getting becomes more transparent, they will “migrate into patterns that are not price-dependent, but more focused on ROI and branding.” Still, he did concede that “old banner business” is being disrupted by programmatic and video, but that’s more short-term.

AOL executives were also pressed on the purchase of One analyst suggested that appears to have lower growth rates and margins than Tremor and YuMe, the latter of which is making its debut in the public markets this morning.

“ is more of a programmatic marketplace, while [Tremor and YuMe] are more in the model of traditional ad networks,” said Karen Dykstra, AOL’s CFO. “The details of’s model show stronger revenue growth than the others, while headcount is lower. It has greater ability to scale internationally, it’s in 60 countries. So there’s a lot more room for growth there.”

Armstrong added that AOL’s focus on building its programmatic abilities and tech stack reflects the need to serve as both an enterprise business and an advertising business. In that sense, will satisfy both those aims.

Other analysts questioned whether the notion that video is a “premium” part of display can hold. One analyst said she was hearing that video CPMs were falling from an average of $23 to $18. “Will there be a commoditization of video as in the rest of the digital space?”

It depends, Armstrong responded. “Our inventory has had cases of going up in some areas and down in others,” he said. “Pricing in the video space will remain stable and something we’ll continue to invest there.”

In the near term, will remain a standalone business and will be allowed to pursue its “manifest destiny,” Armstrong said. But over time, the plan calls for AOL to fold into a larger “enterprise” service offering that will support other parts of AOL’s businesses.

There’s been a tremendous amount of upheaval in the advertising industry these past few weeks, particularly the merger between Publicis Groupe and Omnicom. That deal came immediately after AOL’s announcement of a “programmatic upfront” and a new, exclusive relationship on developing the notion of “real-time” creative advertising with Publicis.

“The Omnicom Publicis merger will enhance the Publicis AOL Live project, but it’s too early to say exactly how,” Armstrong said.

With the deal, analysts are there anything left in terms of building the tech stack?

Armstrong noted that AOL hadn’t been too acquisitive lately, but that, with its expansive video and programmatic capabilities, should suffice in rounding out AOL’s tech stack, which currently includes the demand-side platform AdLearn and the supply-side platform Marketplace — at least for the moment.

Enjoying this content?

Sign up to be an AdExchanger Member today and get unlimited access to articles like this, plus proprietary data and research, conference discounts, on-demand access to event content, and more!

Join Today!