Internet company AOL, Inc. (AOL) reported better-than-expected fourth quarter results on the top-line, with in-line earnings. Management believes that 2011 is the come back year for AOL.
Jefferies & Co. lowered its earnings and revenue estimate for AOL, citing to higher expenses related to investment and acquisition activities. The brokerage reduced its price target on shares of AOL to $26 from $27, while maintaining its hold rating.
While noisy, AOL's fourth quarter results were ahead of muted expectations, on better subscription and cost containment. Management believes that 2011 is the come back year for AOL, with first half marking the trough; while plausible, this would assume material improvement in Display and Search, neither of which is yet apparent, said Youssef Squali, an analyst at Jefferies.
Gross revenues of $596.0 million were down 26.1 percent year-over-year, (against recast numbers) but came in higher than consensus of $587 million (and just slightly below Jefferies' estimate of $602 million). Earnings of 70 cents a share (adjusted for one time charges as per Jefferies calculation) was in line with consensus 71 cents a share.
AOL's O&O Display segment showed continued year-over-year deceleration versus last quarter, coming in at $151 million , down 13 percent year-over-year but growing sequentially by 25 percent.
Domestic O&O Display revenue came in lower than expected at $140 million (down 8 percent year-over-year versus Jefferies down 5 percent estimate year-over-year), and up 24 percent sequentially even as AOL continues to lose Display market share to Yahoo! (YHOO), Google Inc. (GOOG) and Facebook.
We had forecast a year-over-year improvement in this metric as an indication that the reorganization, the salesforce restructuring, and changes to the content/interface were beginning to take hold. Going forward, 2011 offers easier comps, which along with the launch of project Devil and a seasoned salesforce should lead to positive year-over-year growth starting in second half of 2011, said Squali.
Squali said it remains to be seen whether AOL's Display business will catch up to industry growth trends by second half of 2011, however this was reiterated on the call (acquisitions such as goviral, Pictela and other partnerships should help the company improve Display revenue levels).
AOL's Third Party Network saw a 15 percent uptick on a sequential basis (but continued down at 43 percent from last year) to $84.1 million versus $72.8 million during third quarter of 2010, and well below Jefferies estimate of $92 million. The company expects that competition in this area will increase and that Ad.com has the best platform by technology to compete.
Search and contextual revenues fell 30 percent to $96 million (versus Jefferies' 25 percent decline estimate) from last year, due to continuing erosion in dial-up subscriber base, exit from contextual search products, lower international traction, and overall query decline. On a sequential basis, search revenue fell 3 percent versus 10.4 percent decline during third quarter.
Squali expects to see further improvements on the margin in search revenues now that the partnership with Google has been renewed and expanded to December 31, 2015. The company will phase in the new search product from Google this quarter, and hopes to reverse these trends over time.
While the current valuation and cash provides cushion to the stock, we remain on the sidelines given the structural issues. The stock is likely to remain cheap as the company works through its restructuring and until we get some visibility into improving fundamentals, said Squali.
With the stock inexpensive, trading at 4.6 times of adjusted operating income before depreciation and amortization, Squali would consider becoming more constructive on the name if he sees: local traction, i.e. indications that the Patch strategy is working, resumption of growth in traffic to the company's O&O sites, and/or positive year-over-year growth in Display advertising revenue, which is essential to its long-term success.
The brokerage raised its 2011 earnings estimate for AOL to $1.48 from $1.47, while lowering its revenue estimate to $2.134 billion from $2.151 billion. Current consensus for 2011 is profit of $1.37 a share on revenue of $2.096 billion. The brokerage also reduced its 2012 earnings estimate to $1.51 on revenue of $2.014 billion from $1.62 on revenue of $2.023 billion.
AOL shares closed Wednesday's trading down 5.07 percent at $22.64 on the NYSE, while in after-hours the stock rose 2.08 percent to $23.11.