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AOL, Inc. (NYSE:AOL)

Q4 2012 Earnings Call

February 08, 2013, 08:00 am ET

Executives

Eoin Ryan - SVP, Investor Relations

Tim Armstrong - Chairman & CEO

Artie Minson - COO

Karen Dykstra - CFO

Analysts

Brian Pitz - Jefferies

Ross Sandler - Deutsche Bank

Mark Mahaney - RBC

Benjamin Schachter - Macquarie

Ken Sena - Evercore

Laura Martin - Needham & Company

Youssef Squali - Cantor Fitzgerald

Peter Stabler - Wells Fargo Securities

Deb Schwartz - Goldman Sachs

James Cakmak - Telsey Advisory Group

James Lee - CLSA

Operator

Good day ladies and gentlemen, and welcome to AOL Fourth Quarter 2012 Earnings Conference Call. My name is Shaquana and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session. As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Eoin Ryan, Senior Vice President of Investor Relations. Please proceed.

Eoin Ryan

Good morning. Thanks, Shaquana, and everyone for joining us for our fourth quarter 2012 earnings call. You can find our Q4 earnings press release and accompanying slides and trending schedules on our website. On the call with me today is our Chairman and CEO, Tim Armstrong; our COO, Artie Minson; our Chief Financial Officer, Karen Dykstra. Tim and Karen will make some brief remarks on the quarter and our overall strategy, and then we will open up the lines for Q&A.

But first I will remind you that during this call we may discuss our outlook for future financial and operating performance, corporate strategy, marketing and product plans, technology improvements, cost initiatives, planned investments, as well as our expectations for the economy and online advertising in general. These forward-looking statements typically are proceeded by words such as we will, we expect, we believe, we anticipate, or similar statements. These forward-looking statements are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. Reported results should not be indicative of our future performance. Some of these risks have been set forth in our annual report on Form 10-K for the year ended December 31, 2011 filed with the SEC.

All information discussed in this conference call is as of today, February 8 and we do not intend and do not undertake any duty to update this information to reflect future events or circumstances. We will also discuss certain non-GAAP financial measures, including adjusted OIBDA and free cash flow. I will refer you to our press release in Investor Relations section of the website for all comparable GAAP measures and full reconciliations. Finally, from time-to-time we post information about AOL on our Investor Relations website at ir.aol.com and on our official corporate blog at blog.aol.com.

With that, let me get the call going and let me roll the wintry snowball over to Tim.

Tim Armstrong

Thanks, Eoin and good morning, and Eoin just alluded to there is a snowstorm going on but we usually do our earnings call around national disasters, Sandy was the last one, so everybody will be okay. It’s our third anniversary reporting results as a public company and we have good news to report. AOL is back to growth. AOL is at an inflection point as a company and is transitioning into an early stage growth company. We are building the first digital branded media and technology company of the century, a mission we started in 2009. We are driving that mission forward.

Over the past three years ending December 2012, AOL outperformed the S&P, Dow Jones and NASDAQ indices while we have reduced our outstanding share count by roughly 30% giving shareholders a larger ownership stake in a company poised for growth. AOL returned to year-over-year revenue growth for the first time in eight years during Q4. AOL grew adjusted OIBDA in 2012 ahead of our expectations for that to occur in 2013. In three years, we have returned $1.3 billion to shareholders, roughly 50% of the current market cap of the company. Every day has mattered for AOL over the last three years and every day will matter over the next three years as we transition into growth. There are five areas that helped AOL return to growth during Q4.

First is audience growth. Second is revenue growth. Third is continued innovation of world-class products. Fourth is our technology, scale and work. And fifth is talent acquisition. As audience growth continues to improve, consumer traffic showed strong progress in 2012. AOL is growing its users again. In Q4, we grew our usage by 6%, beneath that number is a much stronger trend.

The core focus at AOL over the last three years has been to significantly build up our external audience to replace losses in some of the legacy service businesses. We have made significant progress there. Non legacy users have grown 20% in total from December 2010 to December 2012 at a 10% compounded annual growth rate. Better still engagement from these users has grown rapidly with page views and minutes per month have grown at over 30% compounded annual growth rate.

We are making progress in mobile too. We are the fourth largest player domestically with over 40 million users growing over 10% year-over-year. From a cross platform perspective, the numbers also look encouraging and based on comScore’s new cross-platform measurement AOL attracts 140 million users domestically. AOL experienced one of the largest percentage increases in users under this new measurement method; we have done an exceptionally good job picking up incremental uniques from both mobile and video.

On revenue, revenue growth is happening while we stay vigilant on cost. We grew global advertising revenue by 13% year-over-year. We grew search revenue by 17%. Subscription revenue declined only 10% thanks to 8% growth in ARPU year-over-year and 4% quarter-over-quarter. Our Q4 adjusted OIBDA was $124 million which was ahead of our expectations and the guidance we gave on the last call. Costs were tightly managed in the year with full year adjusted OIBDA expenses ex-TAC, down $66 million. These expenses grew sequentially in Q4, but that is short-term in nature and Karen will speak about that in a few minutes.

In advertising, we continue to improve our yield analytics on both sides of our advertising barbell strategy, programmatic ads and marketing services. AOL is uniquely positioned and scaled in both areas and we have a long-term strategy we are executing. In all during Q4 we worked with 10% more advertisers across AOL properties and AOL networks. We sold over 30% more impressions; we did more business with the AdAge's top 100 in Q4 quarter-over-quarter and year-over-year. We grew our business with the top six agency holding companies in Q4 and quarter-over-quarter as well as year-over-year.

Devil continue to do well with impressions up 13% year-over-year, we are mobilizing around a big push for 2013 and we hope that will be the year of the Devil. Today, there are 52 campaigns running across AOL with 31 different advertisers and we ended up with over 200 partners in the Devil Network.

In Mobile, more advertisers are using our mobile offerings with Mobile revenue growing rapidly off a small base and with Mobile reserved impressions up 82% year-over-year and deliver value up triple digits. The number of advertisers running cross platform campaigns increased by 400% since Q3. At our newly rebranded AOL Networks, we grew the number of publishers we work with by 27%.

During Q4, we had multiple historical record revenue days for ad.com AOL Networks including Black Friday and Cyber Monday. Our DSP is currently ramping with four or the five major trading desks and our total daily run rate is growing at triple digits. Double network closed 2012 over 2011 with significant growth in impression publishers and pricing.

We are building better products over all the business also. HuffPost Live is six months old and gaining significant traction. It was named The Biggest Innovation in Media for 2012 by Mashable. In just six months we had over 128 million video views. We’ve amassed 7.5 million viewers monthly and they are super engaged. They watch for an average of 15 minutes per visit, over 750,000 comments has been left on HuffPost Live and HuffPost Live platform with many of the HuffPost stories and with HuffPost Live videos embedded in them. So we now have a combination of great HuffPost stories and HuffPost Live platform videos integrated together.

In one day alone we got 31,000 comments in relation to the HuffPost Live. On Election Day we had our highest single traffic day ever with 1.5 million UVs, 4 million video streams and 212,000 concurrent viewers.

Over 6,500 guests have joined us from all over the world in the studio via video link. The list of guests spans a spectrum and includes representatives from politics to sports, from chef to actors, from movie directors to entertainers. We’ve had guests on like 50 Cent, Tyra Banks, Shaquille O'Neal, Newt Gingrich, Smokey Robinson, Hulk Hogan, Dan Rather, Nick Hannan, Larry King, Oliver Stone, Verne Ramsey, [Susie Osborne] [ph], Randy Jackson and Mike Tyson and the list goes on and on.

AOL Lifestyle moved up to the number four spot in the lifestyle category overall. StyleList grew 47% month-over-month for December and the whole AOL style category grew 18% in December a great holiday season. MapQuest served nearly 5.5 million navigable routes, found over 12 million points of interest in nearly 2 billion searches in 2012. This business has real value and is turning around.

In Autos, we continue to gain traction with our upfront commitments for 2012 and in total the AOL Autos and autoblog businesses are up double-digits year-over-year. We also recently announced on SPEED TV the intention to broadcast both our original video series TRANSLOGIC and The List which is an interesting example of taking online content to offline media as the line between the online and offline continue to blur.

We relaunched Engadget, we relaunched Moviefone, we relaunched games.com with a library of over 5,000 free games. Patch saw a record traffic growth in Q4 and our product was used in the 300 towns affected by Sandy. We are currently testing beta sites and new designs of the Patch product.

One thing I just wanted to highlight with Patch is Patch continues to see record traffic. The revenue on Patch was affected by two things. We did not reach the $40 million to $50 million goal, out of the 300 plus, 329 Sandy towns which are earliest towns and tend to have the most revenue in them, we saw in effect from those and two is we've been working the company towards profitability and we had very good results in terms of bringing Patch towards profitability which we've promised for this year.

In video, we remain number two in video views for the sixth consecutive month with over 2 billion video views in Q4 up approximately 75% year-over-year. We retained comScore number one position in users for eight major categories, pet, tech, home, food, education, travel, autos. We launched AOL on YouTube delivering thousands of AOL programming as well as bringing our ads to YouTube. We announced a number of distribution deals including recently with Discovery Channel and Martha Stewart.

We are looking forward to updating the ad industry on our video progress at the joint TV web video upfront in April. And while we have a lot of innovation happening in what we are working on, we also have been doing a very good job of reducing the non-core products and we are growing and trimming at the same time.

So between advertising and products, we see the combination of investment in products and investment in our advertising systems allowing us to get to the point where we are seeing right now as we stand in the quarter growth in domestic display which we are very happy about.

In technology, we continue to be pleased with the progress that we are making across the globe. AOL has all of our engineering projects prioritized and we are allocating resources on to the biggest opportunities and we had some great examples of things that we launched this year through the technology team.

New mail product in Alto which is a great product if you haven't tried it. We launched a new global search app which allows us to do a global search across 46 languages simultaneously across the globe with instantaneous updates. We had great ad stack expansion into the publisher and agency businesses with managed service products.

We had upgrades and new open building integrations on the subscription platform and overall we continue to trim. We've removed 8,000 servers and 1,500 databases at the company during the year. On the talent side of the business which is critical, we had some great progress as well. We are named 2012 Working Mother 100 Best Places to Work for the fourth consecutive year.

Our internal training program on university won best HR idea from HR Executive Magazine. Referrals to the company from current employees has grown 94% year-over-year last year. 25% of AOLers participated in the Employee Stock Purchase Plan which is well above the national average of ESPP program. We also made a number of commitments to our shareholders in 2012 and I want to spend just a couple minutes reviewing those with you.

Number one, we said we would grow adjusted OIBDA in 2013. We grew OIBDA year-over-year in 2012 a year earlier than we said we would and we remain committed to doing it again in 2013. We said we would return a 100% of the patent proceeds of that transaction to shareholders. We completed that in a very efficient manner.

Number three, we said we would bring Patch to run rate profitability in the fourth quarter of 2013 that remains our goal, our intent and we're working towards it.

Number four, we said we would add two new highly qualified directors in the next 12 months. We have added two directors who are incredibly talented and will help us bring the Board talent up.

Number five, we told you we would be organizing by operating segments by the end of 2012. I am pleased to announce today that we completed that commitment and you will see those in our financials.

In 2013, you should expect the following things from your investments in AOL. First, continued strategic and operational improvements against our articulated and consistent strategy that will allow AOL to grow.

Number two, improved shareholder outcomes to growing revenue, cost management and effective use of our non-strategic asset.

Number three, a leadership team that will continue to improve our product and services while making tough changes that will improve the company.

Our plans for 2013 and 2014 are built around a segmented structure we're now operating in and they are underlined by a plan to exploit cross product leverage to get more than our fair share of consumer attention and advertiser revenue. We've outlined our results by segment in the press release and Karen will talk a little bit more about them shortly, but here is my summary of the segments and the information released today.

The Membership Group is highly profitable and have slowed in its decline and we would expect that trend to continue. AOL Networks is a strong growth business. It has low margins now due to our investments in that business but those margins will expand.

The Brand Group houses a number of brands in investment mode but the incremental margin here is very high and we have already made significant progress in improving the Group’s profit profile. In the corporate bucket, our corporate expenses are too big and there was clear opportunity for us to reduce our expenses and at the same time while we are improving the segmented businesses.

I am going to put my investor hat back on right now and later today we will announce - due to the share consolidation and other things I am now over 5% consolidated holder of AOL equity. So this, when I say this, this is me talking directly to you as the largest single shareholder and why I am excited about the segments.

Number one, we can improve AOL’s segment by improving the customer experience value and relationship. Number two, AOL Networks should grow and become more profitable. Number three, the Brand Group should grow and become more profitable, and number four, we should be able to meaningfully reduce the corporate expenses at the company.

And the last point, we have a proven track record here of cost reduction. We have taken out over $0.5 billion of cost since becoming a public company. We intend to continue that track record.

As you consider your investment in AOL for 2013, you should expect to see us continue to make the hard changes to the company that will allow us to compete at global scale in the media and technology business. While AOL may have already gone through significant transformations, many companies in the media and technology world are facing similar challenges over the next decade. By changing AOL quickly, we have positioned the company to ride the coming disruption curve. The changes you will see at AOL this year are meant to push the company deeper into the center of the coming disruption and we will focus on growth.

Growth comes from creating and building world class experiences and we will continue to fill the company with world class leaders who can drive growth. At a very personal level I want to thank the shareholders that have walked through this journey with us. I know they’ve had to sit through investment committee meetings, partner meetings and around the kitchen table, answering the question, why would you invest in AOL.

I think in 2012 we have made answering that question a little easier and in 2013 we would hope our work would turn that question on its head and the question will be why would you not invest in AOL.

One additional note of thanks, I wanted to highlight in 2012 the work of AOL’s Board of Directors and our management teams across our business as well. AOL has continually faced daunting challenges on the path back to growth, the team work, resolve and judgment of our leaders have been a major highlight and a huge asset for our shareholder base.

In particular Fred Reynolds, our lead director has been a tough and caring leader throughout AOL’s comeback. We would like to thank him and the other directors for their help including Karen who was the director until she became CFO. For 2013, the roughly 5,000 AOL team members will be listening and executing against the deep needs of our consumers and our customers and that is what is going to drive our mission.

AOL’s future and culture can best be summed up by Andy Warhol's quote, don't think about making art, just get it done. Let everyone else decide if it’s good or bad, whether they love it or they hate it, while they are deciding make even more art; while the world is deciding what they think about AOL, we are continuing to do what we do best, getting things done and innovate by doing and focusing on growth.

Let me turn it over to Karen Dykstra.

Karen Dykstra

Thanks, Tim and good morning everyone. We have got a lot to go through this morning so I will get right into it.

For me there are five main takeaways from the results we reported today. AOL has returned to revenue growth for the first time in eight years, and we've demonstrated improvement across the company on both the consolidated and segment level.

Number two, we have a track record with expense reductions, and although we increased investments in Q4 as we had planned, we will continue to reduce costs further and leverage our infrastructure going forward. Number three; we are now managing and reporting our business in three distinct segments with improving trends in each of our segments.

Number four; through our share repurchase programs we've reduced basic shares outstanding from 106 million shares when we became a separate company three years ago to 77 million shares as of December 31, a 27% decline while purchasing at prices significantly below our current share price. And AOL’s Board recently authorized the purchase of an additional 100 million shares which we continue to believe is an attractive investment.

Number five, we are well positioned for revenue and adjusted OIBDA growth for 2013.

Now I will comment on results for the consolidated level and then I'll go a bit deeper into the segments. First we are proud to report 4% revenue growth; it’s a significant milestone for the company. The growth was driven by 13% growth in advertising revenue, which reflects 17% growth in search, 31% growth in third party and flat global display. In search, the driver was double digit growth at AOL.com, the eighth consecutive quarter of year-over-year growth for AOL.com. Over the course of the past year we made numerous improvements to the consumer interface and monetization of our search experience, resulting in consistent revenue research growth.

With better search product we began driving additional queries to AOL.com through marketing efforts, which added approximately 10 million to the search revenue. Excluding these efforts, search revenue grew 6% compared to 4% last quarter and an 8% decline in Q4 2011, to solid growth without the marketing efforts. The main driver of AOL’s return to search growth has been consistent over 20% revenue growth on AOL.com. AOL.com in Q4 represents approximately 50% of search revenue, compared to 37% last year and we are very happy with this progress.

On the display side, as Tim mentioned the combination of global display and third party network revenue is what we believe to be the most representative of AOL’s reach in the branded display market. Combined revenue for quarter was 307 million up 11% year-over-year and driven by a 31% increase in third party network revenue, which has significantly improved from the 18% and 20% growth in last quarter and Q4, 2011 respectively. Advertisers and publishers continue to be attracted to our AOL Networks business by its scale, technology, breadth of offering and most importantly its ability to maximize yields of all parties.

Global display revenue was flat with 25% growth in international display, offsetting a 3% decline domestically. International growth is coming from continued strong performance in the UK and Canada, and domestic declines continue to be driven by more of AOL’s inventory being sold through AOL Networks, which is negatively impacting aggregate pricing despite the fact that we continue to grow pricing in our premium offerings for the quarter.

And last subscription revenue where trends remained very strong, revenues declined 10% due to a 15% decline in subscribers and 1.8% churn rate versus a year ago. Looking back a year ago, revenue declined 18% year-over-year and churn was 2.2%; so a dramatic improvement in those areas. In Q4, ARPU grew 8% year-over-year benefiting from our ongoing price rationalization program. ARPU grew 4% over Q3, resulting in sequential growth in subs revenue which is very encouraging.

Turning to profitability, I will point out that we changed our definition of adjusted OIBDA to exclude significant special items like income and expenses related to the patent transaction and expenses related to the proxy contest. We believe these items are not indicative of our core operating performance. Excluding these items yields are more apples-to-apples comparison for measuring our operation. We made this change effective Q4 and have adjusted historical numbers accordingly and you can see them laid out in our trending schedules, which we released today.

For the full-year 2012, we reported adjusted OIBDA of 413 million, with 1% year-over-year growth, returning AOL to adjusted OIBDA growth, which I will point out is one year earlier than we had expected when we first communicated that goal in June 2011. Q4 adjusted OIBDA was 123 million and excludes 13 million of special items during the quarter, which related primarily to especially year-end employee bonus related to the patent transaction and cost associated with the acquisition of Buysight, which is a retargeting technology company, which enhances AOL Networks platform stack.

Similar to other deals we have done in the past, we structured the buy side acquisition in a tax favorable way. However, for accounting purposes this ran through our P&L in Q4. A little more detail on our expenses. In Q4 expenses rose sequentially and year-over-year as we previously communicated and we invested in our people, businesses, technology and cost of revenues increased 30 million compared to Q4 last year, 21 million of which is attributable to increased tax because of the rapid growth in our AOL Networks revenue and incremental tax related to our search and marketing efforts.

Additionally there were 11 million of special items recorded in the cost of revenue, which I just mentioned. These were partially offset by continued lower expenses associated with our technology infrastructure. D&A expenses also grew in the quarter $15 million sequentially, this was primarily driven by 12 million increase in marketing expense related to production for a number of brand campaigns across AOL, some of these will run in 2013.

Now I will turn to segments, which we laid out for the first time and described in our press release. I don’t want to be repetitive of the release but I will just give you a couple of high level thoughts on how we think about the opportunity in these segments. We operate in three reportable segments, the Brand Group which houses AOL.com, Huffington Post and most of our other content brands. Membership Group includes our subs business, AOL Mail and AIM, and AOL Networks houses Advertising.com, AOL On, Pictela, goviral, ADTECH and sponsored listings business.

Second under our new reporting structure we are managing each segment as though they are an independent entity and therefore transactions between segments are treated as such. For instance, AOL inventory from either brand or membership groups sold through AOL Networks is recognized in AOL Networks as gross revenue with a corresponding intersegment TAC charge, an amount equal to the TAC charge reflecting the revenue net of the margin retained by AOL Networks is then reflected in interest segment revenue within the Brand Group or the Membership Group depending on where the inventory sits, and you can see an example of this in our slide and our materials for the call on page 14.

The Brand Group encompasses a number of brands in different stages of their lifecycles, some contributing profitability more than others and as a whole we have made significant progress improving the profitability of the segment on a side by side level. We are focused on growing revenue and managing expenses in the segment, while continuing to invest for long term growth.

In 2012, adjusted OIBDA improved by almost $15 million, despite the cost associated with introducing new products and expanding into new markets. We believe there is very high incremental margin in the brand group which would be a great benefit to us with display advertising growth. So over the long run as we grow revenue and manage expenses, we expect to see margin expansion here.

In the membership group, we redefine the value proposition of the business, really going away from services that just get you online towards highlighting the value proposition of the total subs bundled that our subscribers receive. This is resonating with our subscribers and is evident in our metrics. Only 8% of our subscribers used AOL to access the Internet and our save rate of those calling our call center with the cancellation request is now almost 35% compared to the 15% in the beginning of 2012.

Clearly, this is a very profitable segment and over time we've been able to maintain relatively stable margins despite the decline in subscribers. We have a well established track record of effectively managing this segment and expect to continue on that path which represents significant value for our shareholders.

At AOL Networks, as is the case with the Brand Group, there are a number of different product offerings here at different stages of their lifecycle, all growing rapidly, but with still some investment mode. So total Networks revenue and margin trends are improving, leveraging some of the mature businesses while investing in new products and services. We will continue to invest for growth in this area and we are very well positioned in front of the shift to programmatic buying which is obviously a very large opportunity. With that will come margin expansion as we leverage our platform.

And finally corporate and other, which is made up of activities that are not directly attributable to a specific segment. These include certain expenses that we expect to continue as we actively defend our intellectual property portfolio and as we continue to manage our historical complex tax structure as well as non-core operations and AOL ventures is also included in corporate and other.

Over the long term you should expect us to make meaningful progress towards lowering these expenses as we've done in the past three years as Tim has said previously. I want to spend a moment on AOL expense reduction in general. If you look back, we are exceptionally pleased with our level of cost reductions since 2009 and I think you can see some of that data in the slides that we provided. This coupled with significant trend improvements in advertising and subscription revenue has a meaningful impact on our current and future cash and profitability.

Most importantly, we reduced expenses while investing in the future growth of AOL. These continuing trends plus the opportunity to lower corporate expenses gives us confidence in our ability to grow earnings. We believe adjusted OIBDA will grow in 2013 and we believe there are some upsides to the current consensus which is about $410 million.

Now I will just turn for a couple of minutes to the balance sheet. We ended the year with $467 million in cash and cash equivalents, which is outstanding when you take in to account that we returned $1.1 billion to our shareholders in 2012. During the quarter, we pulled an additional 14.4 million shares through our ASR agreement with Barclays, leaving our common share count at December 31, at 77 million, and as I noted at the outset of my remarks, our Board just authorized the repurchase of a 100 million in stock.

Free cash flow of $46 million for the quarter declined year-over-year primarily due to a number of special items in Q4 previously mentioned. We also had some minor acquisitions and the consolidation of Ad.com Japan which increased receivable balances year-over-year. And one additional factor to consider, as our third party revenues outpaced subscription and display revenues our receivables will be higher relative to our earnings and I also want to remind you that Q1 will be our low point with cash flow consistent with prior years as we pay out bonuses and such and will be positive for the remainder of the year and we again expect to see a very healthy conversion of OIBDA and to free cash flow.

Now finally a couple of housekeeping items related. We spent $65 million in CapEx last year. We managed CapEx very carefully and in 2013, we expect to spend a similar amount as we did in 2011. And also a reminder that we are not currently a cash tax payer and expect to continue to benefit from a meaningful tax shield beyond 2013, but we do record book TAC expense for the income statement purposes.

So to conclude my remarks, I am very pleased with our 2012 performance, not only for our shareholders, but also for the AOL-ers who have waited a long time to see AOL return to growth. The trend for AOL is an improving one and we are focused on capitalizing on the momentum and extending it in to the New Year where we expect to continue growth in both revenue and adjusted OIBDA.

So with that, I will open up the call for questions and turn it back to the operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Brian Pitz, representing Jefferies. Please proceed.

Brian Pitz - Jefferies

Thanks. Tim, you've done a great job of generating a lot of value for shareholders at AOL, but the biggest question we continue to get is why isn’t the advertising business profitable, especially as most comparable ad businesses are and while you may have touched on a little of this, would you walk us through the business within media that are using the most cash and maybe some thoughts on how you prioritize initiatives to address this? Also, just a quick question on underappreciated and undervalued assets. We've always been big fans of AOL music properties as well as your third-party ad network. Any thoughts on how you begin to unlock value in these assets? Thanks so much.

Tim Armstrong

Sure. So just to be clear, our ad segment is profitable for us and I think if you look at the segment information, so I would say this after spending 20 years in the ad business, in digital ad business overall the investments we are making I think that the ad business is actually more successful in my mind than probably you see right now and the reason is because when you think about the ad business that we are investing overall comes down to kind of three simple areas. One, on the advertising side of the business, the advertiser side; the second is the internal systems we have and third is the publisher side.

And if you look at what we have been investing in the business, we have gone from focused – the company I think will keep more focused on sort of commodity where things are going to be very commoditized overall and we have been migrating investment in the ad business up into the non-commoditized areas, so things like video, Project Devil, those types of things and then also doing things like HuffPost Live over time which I think will offer because there’s a lot of advertiser interest in those type of products.

So on the advertiser side, our investment in ad just split kind of in two areas; one is on the managed service side where we are actually starting to provide white label solutions, high scale technology at low cost to advertisers. I mentioned in my remarks four or five out of six trading desks; four to five trading desks right now and that is a business AOL was not in two years ago. So there’s an investment in technology and engineering we have actually been investing significant amounts of resources in that, but we also have a market lead there and are one of the top three players in that industry. So, on the advertiser side we are happy to have investments.

On our internal systems side, we have done a very nice job of investing in things within our systems that are very attractive both to the advertiser and publisher community as well as making our system more efficient for internal users of the systems overall. And basically, on the publisher side we have been investing in the same thing in white label technology solutions to go after that business as well. So you are seeing us in the marketplace now providing more and more services in the ad stack for publishers.

So the ad business itself if we ran it, surely profitability and we didn’t put any investments in the ad stack side of it, I think it would be a mistake at this point as an investor you should want us to invest, we have a foothold down in the top three spots in that business and you see the external noise around people investing in ad stack and doing things, we have been pretty maniacally focused on that area making tremendous progress.

Second piece of ad investments we have been doing is around our products and the marketing and services side and I think investing in the marketing and services side of our business, quick example of our, Verizon partnering with us for CES with Engadget which was a very significant opportunity for them and for us had a lot of technology around the content side of the business and the event side of the business there, so we are putting investments there as well. We would expect the ads business to get more profitable, I mentioned, we expect the margins to go up there, but we’re very happy internally with our investments in those businesses.

Second thing is just media cash usage, and I think when you look at all of our portfolio and properties, the bigger area is that we are using cash against our things like HuffPost Live and Patch and lot of the investments that we have been making in really building out the services that we have in those areas as well as we’ve been reinvesting in AOLs core service over time. So what the company look like three years ago in terms of cash investments was kind of all, it was 320 or so brands or sites that we were kind of putting investments in. When you look down the list now, we have a prioritized list. I will go through them but there's seven items that are getting investment in our strategic plan right now in the media bucket and in those seven items, three or four of them are getting most of the cash usage in terms of investments. And meanwhile, we are also taking investments out of the smaller non-scale properties as well. So we expect that bucket to actually get more profitable over time as well.

And I would just say lastly on the kind of asset side of the business and Artie can talk to this as well. I would just say on things like music, we have certain areas of our business that we are focused on that we know our assets, they are not in the top three or four things we are focused on but we know we can unlock value there, Artie, I don’t know if you want to talk about music and all?

Artie Minson

Yeah, Brian, to your point on AOL Music, it is a top 10 music property. I think right now, it’s about number eight domestically plus in addition to that we have the Winamp Music Player which is, that has about 30 million UVs internationally so and our US assets that have 10 million UVs.

If you look at the size of our music business in terms of UVs, it’s actually about the size of Spotify just to give you a sense of the scale of that business and actually our engagement is very meaningful when you compare it to the peer group. All that being said to Tim’s point, we are not satisfied at all at being number eight and if you look across and Tim had hit it a little bit in his remarks, we've launched the number of the properties, we relaunched Moviefone, we relaunched games.com, and music is an area that we think frankly the best way for us to continue to unlock value is to improve the product, drive UVs and drive engagement.

We have a site we have operated about two years called Cambio which caters more to the teen community but it’s very music centric. And it’s focused and you will see us having that site work more with AOL Music in the future. So I think really for us it’s going to be about organic improvement in the products much like you've seen across the bunch of the other properties and I think that's the best opportunity for us to drive value there, (inaudible) ad.com.

Brian Pitz - Jefferies

Thanks for the color.

Tim Armstrong

Yeah, I mean at ad.com I don't think we have any huge announcements on the asset side. I think from our standpoint, we've been investing in the areas that we think are most important. Video has been a huge area of investment. We are number two after YouTube in video views and also I think another investment area is Buysight the retargeting company that we bought. So we have a clear strategy, clear plan and clear ad [text stack] [ph] visibility which we are investing in.

Operator

Your next question comes from the line of Ross Sandler representing Deutsche Bank. Please proceed.

Ross Sandler - Deutsche Bank

Just two quick questions. First about the corporate expenses and second on subscription revenue. So first, Tim or Karen the $200 million of annualized corporate expenses seems like the opportunity to reduce the cost structure that you mentioned, what costs are in that line and where could that annual expense run rate go in the next couple of years?

And then second on the subscription side, now that the core access part of the sub base is down to 7% as you mentioned, what's the growth rate for the rest of that subscription business and when can we see that part of the business actually start to grow year-on-year, could that happen in 2013? Thanks.

Karen Dykstra

So, I'll take the corporate expense question first. You know, if you look at our progress over the last three years, I think you see that we’ve made significant progress reducing corporate expense and we've done it by really skillfully carving out the expenses without disrupting the business, and we expect to do that going forward as well.

It's important that we do it with precision and non-business disruption. What kinds of things are in there are typical corporate department expenses like human resources, finance, facilities, legal, some global marketing and also I will remind everyone that the AOL Ventures is in that corporate and other segment as well.

I think that our corporate expenses are higher than you would typically see because of historical legacy issues with AOL. We have a pretty complex tax structures. We were a very large company with a lot of international locations years ago. We have a significant legal expense budget because of all of our intellectual property.

We have some legacy facilities commitments that are higher than typical and so on. So there are some reasons for the large size that it is right now but again I think that you see that we have successfully been reducing it year-over-year and we're laser focused on continuing to reduce the corporate expense.

Tim Armstrong

Artie why don't you take the subscription?

Artie Minson

Sure. We're very pleased with the subscription results. This is basically the minus 10%. The last two quarters, it's the best performance we had in six years and what you are seeing is our ability to manage effectively both the ARPU and the churn reduction and the way we are really doing that is we’ve continued to add significant value to the service and we are seeing significant member adoption of those services to the tune of about 5,000 services are being adopted a day by our members.

So it’s becoming more and more of a premium broadband offering and obviously less and less about on activity. As I have mentioned in the past, we do this year have some plans to roll out our new subscription service. We are in beta with it, now we have about a 1,000 people on the beta and our expectation is probably in the beginning of Q2 you will start to see us roll that out a little bit more broadly.

Don’t want to make any real predictions about where the subscription business could get back to growth. We are very pleased with the performance today as Karen said in her remarks where, we believe where we have been able to navigate it with margins staying constant is a very much positive for shareholders and as I said, we are working on developing some new subscription products which we will talk more about as the year goes on.

Operator

Your next question comes from the line of Mark Mahaney representing RBC. Please proceed.

Mark Mahaney - RBC

Two questions. I think Tim you made a brief reference to domestic display, I may have misheard you but possibly growing again in the March quarter or just maybe more importantly your thoughts on how do you get that segment to grow? And then if I could just ask about one particular property MapQuest, the thoughts on them the monetization potential there, is anything you could quantify in terms of the contribution of that asset now but mapping seems to be, map assets seems to be one of those great, highly used assets across the Internet that to date hasn't been monetized that well, maybe it can't be but any thoughts about what the potential is there? Thanks a lot.

Tim Armstrong

Sure, Mark, first of all, great to have you back on the call and back in action and we are basically, domestic display, right now what we are seeing trending wise is strength in domestic display. It’s early in the quarter, but we have made a tremendous amount of progress both with the ad sales, ad products as well as the properties in general, and I think one of the things that investors don't see which we are trying to make more and more transparent under our results is a lot of the properties that we have been investing in and have acquired or that we have relaunched are actually doing very well on domestic display.

We are part of domestic display deals with the tailwind – the headwinds of the AOL services stuff. So I think we are basically seeing domestic display improve right now overall and I think that is because of our internal stuff, I also fundamentally believe a lot of things you are seeing in the industry right now offline is driving more interest from advertisers online and that looks like a long tailwind for the future.

So as we sit right now, we think domestic display will improve and again I don't know it's, we still have more time left for the quarter so we will see.

And then just quickly, on MapQuest, very big asset, as a matter of fact, I think there was an article in the Economist or another publication I was reading in the last couple of weeks, which laid out the major mapping properties and didn't include MapQuest and that is a huge mistake, we are the number two mapping property in the US, we do billions of searches on there, we have incredible affinity with the consumers and from an improvement standpoint we’ve talked about things we've done in the last couple of years going to open mapping, things like that and that we originally integrated business service locators and other things which are growing nicely and I think from that standpoint we think it’s a big asset.

Artie Minson

Yeah, actually Mark, Tim and I actually had dinner the other night with the MapQuest team and I think you will see a number of product improvements this year. I don't know if you checked out the new MapQuest Discover product which is going to allow people to talk about their trips in the community like function. We are going to add more utility functions to help people plan and book trips. The other opportunity frankly we are looking at is we have massive amounts of data on obviously where people are going, their cars etcetera and that's an interesting B2B opportunity for us. So we agree with you it’s a very significant asset. The team there we have new leadership team in place at MapQuest and they’ve put together a very aggressive plan for the next few years so we are excited about the opportunity there.

Operator

Your next question comes from the line of Ben Schachter representing Macquarie. Please proceed.

Benjamin Schachter - Macquarie

Three quick questions around search, number one, just for reporting purposes, can you define how you are booking search in the brand versus membership? Given tool bars and some other things, there seems to be some blurring between those segments. And then number two, on just the 4Q search, when you exclude the non-organic search revenue kind of the [arm] stuff you are doing, can you break out the growth of organic search between volume and price? Are people actually searching more on AOL or is it just pricing? And then number three, how if at all will recent Google changes around quality improvements impact your non-organic search business? Thanks.

Tim Armstrong

Just one quick thing before we jump in the answer, I just want to let people know search has been a big topic industry wide. We are very carefully managing -- we have a 12-year relationship with Google that's worth a tremendous amount to our shareholders and to Google. So, we are managing it very carefully, and I think one of the things that we've done a very good job off is staying in close communication with Google both organically and in the non-organic area. I just want to make sure you guys know that's on our radar screen and in the partnership radar screen overall.

Artie Minson

Let me walk through the details of some of your questions there. First, just on toolbars, I do want to also point out that that's a very small part of our search business and particularly as it relates compared to competitors, and I know there's been a lot of noise of late in the toolbar space. If anything, our toolbar activities are really the burn off of some legacy toolbar stuff we had done years ago, and you don't really see us too active in the downloadable toolbar space. So, we are really not exposed there at all.

As it relates to sort of rate versus volume, your question, really what we've been able to do on the search side is significantly -- because the product we've worked with Google to significantly improved the product, what we've done on the commercial query side of the business is being able to drive click-through rates, because we are frankly serving up more and more relevant ads, but we saw meaningful improvement year-over-year in click-through rates with CPCs being essentially flat year-over-year. So that is something we are pleased about. Your question on the 17% growth rate and how that breaks down between what's organic and what is partner, basically the organic piece of search, the non-partner was about 6%, and if you look then at sort of a search revenue net of maybe partnered TAC, we would get to about the 8% range, because as we’ve said in the past, the margin is lower on the search partnership side of the shop, about a 20% margin business on that incremental revenue.

Operator

Your next question comes from the line of Ken Sena representing Evercore. Please proceed.

Ken Sena - Evercore

Just going back to the ad technology discussion, you know, there have been a lot of partnership and asset swapping recently with Yahoo and AdMob, and at the AdSense and also Microsoft potentially selling Atlas. Are there any asset that you would like to see Ad.com have, whether you know, for desktop or for mobile targeting, and also can you give us some sense of the OIBDA target for that division overtime? Thanks.

Tim Armstrong

Basically, overall, I am not going to into lots of detail here other than to say, the investments we’ve made and acquisitions we made so far in the ad stack business have put us in very good standing and strong standing, and we're continuing to operate that stack very closely. And again, I mentioned a little bit earlier, but when you see the announcements happening inside of the industry, you have to take a few things into account. Number one is the structure and setup of the technology inside of the agency holding companies and how those announcements affect those relationships and where ads get run, those things. The second piece is the same thing on the publisher side, what publisher tools people are using overall, and then the third piece which I think is critical is how are you yield managing the dynamic areas within that ad stack.

So, a couple of years ago, a few years ago, the ad stak was mainly display targeting. Today, it is mobile, video, and a number of other things getting involved there. And on the areas that we have focused on the as stack are the following: one is the integration with mobile which we believe we have a strategic, at least somewhat lead in or partner lead in. Second piece is the investment we have done in video, which we think cuts through the ad stack and cuts through mobile very well overall. And the third area are putting in pieces inside the ad stack which incrementally drives more value for the advertiser and more value for the publisher, which are things like the Buysight  acquisition, it’s also the launch of AOP, those things.

So, when you see a lot of partnerships getting announced in the industry typically it is to fill gaps, we have filled in a number of our gaps. And then on the future side of the ad stack business, we want to stay really competitive there, and I think we will have to aggressively continue to play in that market both development wise and partnership wise there. I would take a lot of the partnership announcements getting done in the industry as a good sign for us because those are the things that we have really worked on over the last couple of years, and we have made a lot of progress, and I’ll let Karen handle the OIBDA question.

Karen Dykstra

So, I think a way to think about it is that on the revenue side, we should, based on our current course, be able to grow at or above market rates because of our rich stack of assets and our robust technology. So, I would look for solid revenue growth, and on the profitability and what we expect long-term out of the margins, we’ve made significant investments in this businesses as we’ve have added to that tech stack. We have invested in engineering, and we have recently done a small acquisition, and we have been able to absorb the retention comp related to the acquisitions in 2010 and 2011.

So there are reasons for our margins as they currently stand, but I think we should be able to leverage our support structure, especially domestically and as we expand internationally. And over the long term, I think we should be able to get to call it high-single, low-double digit OIBDA margins overtime. But remember, we will be continuing to invest in the area. In the short term, we continue to make investments. Over time, I think that’s the way you should think about high-single, low-double digit margins.

Operator

Your next question comes from the line of Laura Martin representing Needham & Company. Please proceed.

Laura Martin - Needham & Company

Yes, two for Tim, on Patch, it sounds like we didn't hit our goal of $40 million to $50 million of revenue, and we are iterating on the consumer facing side. Could you just talk about what you learned, and one of the things you had said is, if you didn't hit your goals you might take in a partner there, could you talk about your updated thinking on that. And then secondly, away from Patch, could you talk - you had a statement in your prepared remarks that you are moving AOL towards the center of the coming disruption. Is that in relation to Ad.com or is that, don't let me put words in your mouth, what’s the coming disruption that you are moving AOL towards please?

Tim Armstrong

Sure, I have been spending a fair amount of time in Patch recently and really getting into where we are. I think it’s a critical thing for us this year as a business and has been a critical investment. So, I think Patch, let me just start up for the couple things that are high level. One is, Patch hit 41% consumer growth in December, and I think those are the types of our consumer growth numbers where you can take a step back and say, Patch fills a really, really, really big need.

On the revenue side, I think we expected to get to $40 million plus in revenue, but one of the things that we shifted gears on in the summer was to really focus on how do we get Patch to profitability, and one of the things that was a huge highlight for us this year was Patch expenses were significantly down year-over-year, and the team did a really good job. So, you had kind of double-digit increases in traffic, double-digit decline in expenses overall, and you still had really good growth in advertising.

And then I would say we didn't expect the Sandy storm, and I think a lot of people didn't expect it. It was 329, I mean, Sandy essentially followed the path of the Patch roll out, and although it hurt our revenue in those Patch towns overall, I think Patch actually became a more important stronger company in those towns, and as an investor, although we didn't get to $40 million, the Patch became a more valuable asset in the communities we are in, the answer’s yes.

So, I think when you look forward to this year, let me just describe what we are spending time on, so you understand it clearly, and I will be transparent about this. Number one is, we are committed to getting to the Q4 profitability for Patch overall as a business and that's requiring us to focus on three legs of the stool.

Leg number one is, improving the Patch product in service for consumers and there’s a simplified version of Patch coming, which essentially focuses on three or four things there, and we are making very nice progress there. The second part of the stool is on the revenue growth side, and on the revenue growth side, there's kind of three areas right now of immediate revenue, one is national revenue, one is regional, and one is local. We played very heavily in local and in national, and we are un-tapping the regional revenue now, so we expect to make progress revenue wise. And then the third area, we’ve had a lot of companies approach us on partnerships around Patch overall, and if you take a map of the United States and look where the Patches are, we've taken the Wal-Mart strategy of putting big -- essentially the same thing Wal-Mart did which would give small town people access to big town information. We are doing the same thing with Patch.

So if you are media, if you are on a television station or radio station or newspaper in a major metro area, chances are you cut back on your content investments, but Patch is surrounding your assets and there are potential partnerships to be done there overall as well, and there's a lot of Fortune 500 companies that most of the Fortune 500 companies have significant investments in Patch town, so they are interested in Patch as well overall.

So, I would expect us, you know, as we get, we are headed towards the Q4 profitability to do improvements in traffic, improvements in how we are going to market on the revenue side, and then there is likely partnerships, but you know there's nothing imminent right now to announce or do, but you should assume we are working in all three of those.

On the disruption side of your question, which I think is important is, especially if you were at CES this year, you saw kind of some -- what I would consider to be mega-trend. One is you see the connectivity level and investments in network businesses going up, I mean just from the meetings, I was in at CES, I added up about $30 billion going into network speed and more investments going into device speeds, screen quality, and those things. When you look at what we've been able to do with things like AOL On, you see the disruption of us being, I think we were number 27 in video a couple of years ago to being number two in video views.

That disruption is coming because we made smart investments and done a good job on the product side. It’s also coming because consumers are consuming a massive network speed, speed up, massive amounts of high-quality video on devices and networks, and if you look at the structure of our company, which is big investment in technology, big investment in content properties, consumers are attracted to the things that we're doing if you look at our consumer usage.

Advertisers are attracted to the things we're doing because the consumers are migrating quickly, and if you think about our infrastructure, cost structure, focused technology stacks, those things, and compare them to the companies where consumers are leaving and ad dollars are leaving, we have a competitive disruptive advantage, and I would expect us to move faster and faster and faster into that disruption area where you are going to see things like mobile, video, high-quality display advertising, metrics, analytics, and following the consumers more and more quickly overall. If you look at some of the TV metrics, some of the cord cutting metrics, those things, you don’t have to look very far in the future to see the things we're investing in are going to be very attractive to consumers and customers.

Operator

Your next question comes from the line of Youssef Squali representing Cantor Fitzgerald. Please proceed.

Youssef Squali - Cantor Fitzgerald

Thank you very much. Two quick questions please, maybe starting with Karen. Karen, can you speak just to the leverage and the model as you see it today, and for 2013 in particular, I guess, as you guys look at slight improvement in the topline, maybe looking at the margin improvement you saw in 2011 or 2012 versus 2011, would you say that 2013 over 2012 should be similar, better, not as much because of the investments? And Tim, already, as you try to accelerate growth of the businesses you spoke to, membership segment will continue to be somewhat of a drag on the topline; how do you think about that business strategically and kind of the need to stay in it; I know you talked about investment, but what is the strategic rationale to own it now? Thanks.

Karen Dykstra

So, I am just addressing the first part of the question on leverage in the model, I think that what you see is you see the improvements overtime in each of our segments, and I think we will continue to see that. Obviously, we talked about investments in the AOL Networks and that we will continue to make those investments, although I think that we have significant leverage in the model, in the networks as we continue to make those investments, and I have talked previously about where I thought those investments could -- the margins in that business could go over time.

I think in the Brand Group, there is lot of leverage in the model in the Brand Group and the issues at the moment, as I said earlier, are that we have a lot of different products at different stages of their development. So some of the brands more mature and more profitable than others and some in investment mode, but I think that there is a lot of investment and a lot of opportunity for leverage in the Brand Group, and as we bring in incremental advertising dollars, I think you will see that drop to the bottom line.

And then I also talked earlier about potential leverage in the model in the corporate expenses and corporate and other segment. Do I think that we will see the same kind of leverage in 2013 versus 2012? I think that we had a good year of expense reduction in 2012, and we will continue along the lines of leveraging in 2013, but I do think we have also some very significant opportunities in some of the key strategic areas that Tim was mentioning such as video and Ad.com, which we’ll make, and we’ll leverage what we can but we do have a significant investment opportunity to make as well, and then I turn it over to Artie for the second part of the question.

Artie Minson

Sure. On the membership side of the business and the subscription side of the business, this was the business that was frankly declining in the 25% range two years ago, and the fact we have been able to get it down to minus 10% at this point and we continue to work on improving the business, that's been able to add significant value for our shareholders.

And knowing how to run subscription businesses well is a core competency we have at the company, and we have a very, very good team  down in Dulles led by Bud Rosenthal who knows the business very well, and as I said, we are working on some additional services that we can roll out. This is a platform that, at its height, was able to build over 30 million subscribers worldwide, so also having the sophistication of that billing platform is an asset we have, but we think we have been able to add significant value for our shareholders in meeting expectations here, and that’s something we can work on.

Tim Armstrong

Just maybe one more thing, there is one thing Artie and the team has done, and we have done as a business overall is, those are also, those are AOL fans as well and I think as you think about that, you know Wall Street tend to think of that as an asset, we think about it as our most loyal consumer base in many cases, so I think we have done a really good job of actually changing the mentality to benefit those customers. So again I think that's an important thing for Wall Street to understand.

Operator

Your next question comes from the line of Anthony DiClemente representing Barclays Capital. Please proceed.

Unidentified Analyst

Hi, this is Ryan in for Anthony. Just two quick ones, I was wondering if you could touch on kind of the opportunity for AOL Networks in 2013 as you think about kind of this continuing shift to programmatic buying and kind of the cadence you are seeing in that on that trend, and I'm sorry if I missed it, but could you also talk about how search revenue is distributed across Membership Group versus Brand Group? Thanks.

Tim Armstrong

So, in the programmatic side actually, let me just hit something very specific there because I think it’s important. Programmatic buying is not network, a low value type thing. So, I think when you think about -- if you look at the estimates in the industry, it’s somewhere between 7% and 20% of the advertising industry online now is programmatic.

When you go one level below that, you see customers essentially, and I think this is the mentality we are taking at AOL which is anything that can go machine traded will go machine traded. And over a longer period of time, you will see things like TV ad budgets and those things migrate into programmatic. They are actually going to be high value, high CPM types of buys going through programmatic, and I think that's why our investment in that space is important.

Network will be one piece of it, but essentially between buyers and sellers, the same thing has happened in travel over time and other things. The ability for people to directly transact through machine-to-machine trading is important if anything happened at Wall Street. I would also just say importantly, the reason our Barbell strategy is important in ads is because as much as that business is growing, it’s going to continue to grow. Having the assets and the brands in the other marketing services bucket is important, and you are seeing our customer base essentially invest in both areas, and we are one of the only companies that has both areas overall.

If you look at the video growth rates we've had, the consumer growth rates around those things, and if you mix it in our overall investment, take programmatic and marketing services, we think programmatic is going to be an important way, and my guess is pricing on programmatic over time is going to go up, not down.

Karen Dykstra

And very quickly, the search data that you are looking for, ballpark recent data, about 75% or so of searches in brands, mostly home page and then membership takes up a majority of the rest related to mail, and there's a small percentage related to sponsored listings which is in AOL Networks.

Operator

Your next question comes from the line of Peter Stabler representing Wells Fargo Securities.

Peter Stabler - Wells Fargo Securities

I'm going to go all the way back to Brian’s question and investors trying to understand the profitability of the display business. Now, for better or for worse, I guess the Brand Group is going to be pretty closely scrutinized I would guess going forward even though we fully appreciate that there are advertising revenues spread across all the different segments.

When you look at the Brand Group and you consider that all of the Patch investments are in there and that are obscuring the total results, and Karen you touched on this a little bit, can you give us a little bit more color going forward because we believe this is such a critical segment for investors to watch on where this could go in 2013 going forward and what that implies about demand for all of the other assets you have within the Brand Group, and then one quick additional one, could you give us a sense of how the video revenues are split across the segments? Thanks very much.

Karen Dykstra

So, I think it's good to point out that the Patch investment has influenced the margins and the Brand Group over the last couple of years. And as we look at 2013, we will continue to invest in Patch, but we have committed to breakeven by the end of the year, so that’s influencing it. We have made investments along the way, particularly in HuffPost and some of the others at HuffPost like HuffPost Live and some international expansion in Huffington Post, so those we’ve made and we will continue to make.

I think we would look towards improvement in 2013 in the Brand Group. Solely, , Patch, we would look for significant improvement because of the investments that we've made in the past there and some of these other improvements and leverage in the infrastructure that we have already made. So, I would look towards the brand grouping profitable in 2013, and we continue to focus on investing in those that we think have the higher potential and then pruning back on some of the ones that we don’t see as being as high potential for investment.

Artie Minson

On the video revenue, what I would say is it breaks down, about two-thirds of that is in the Network, and one-third of it is into the Brand Group principally related to video revenue on aol.com and now AOL On.

Tim Armstrong

But I want to cement the point around that advertising business in general, because I think the question there is really why don’t we have better margins there. Let me re-pile on an earlier answer which is if you took AOL Networks and compared it as a standalone company in the ad business and you look at those margins and you don’t like them and we don’t like them, right now, we think they can improve but let me hit you with a little more detail on why we're investing and why we think those margins can improve.

One is video, we had tremendous growth in video; second largest content video network by views, number one provider of premium contents, sixth largest video property by users, 2 billion video ad impressions up 100% year-over-year, key partnerships with people like Own and Discovery, Martha Stewart, YouTube, 440% growth in number of campaigns, 96% growth in videos, 850 million impressions served overall.

Those investments that we have put into the infrastructure with video are important and the scale is there, and as we burn off those investments, that will become a much more profitable segment. Second piece is on the display side of the business, we have made some pretty big investments in the display area of the business with BuySight and Pictela  and some of those other things.

We see things like a 150% growth in CPM on the super channel and premium sites, 39% year-over-year sold impression growth those things, so underneath the service and the ad business, you have a tremendous amount of investment going into that business that’s equivalent probably to the content businesses overall, but you are seeing basically mass scale getting up ramped in speed, and if you look at the partnerships and investments that are in the industry right now, I think we have been able to do it at a more efficient level overall. So big growth, big scale investments there, investments burn off overtime, margins go up, and we invest more deeply in the ad stack that’s what I would expect.

Operator

Your next question comes from the line of Deb Schwartz representing Goldman Sachs. Please proceed.

Deb Schwartz - Goldman Sachs

So, first I just want to say thanks for providing segment profitability, it’s really helpful to see the break out there, I know there have been a lot of questions on the Networks Group, I was wondering if you could just drill down a little bit more on margins there, and if you could help us understand what gross margins were for networks in 2012, and when you think about margin improvement and getting to double-digit margins in that segment, how much of that is gross margin improvement as you shift to more programmatic buying and the spend roll out to supply-side platform?

Artie Minson

It's Artie. Let me give you a little bit of detail there and just things to focus on, you know, to Tim’s point, we have made significant investments in the area, but that being said, you saw a significant conversion of incremental revenue in that group into OIBDA, we converted incremental revenue at about 30% level in 2012, and so Karen’s earlier comments of where do we think the margins can go over time, that's what I would hope that we would be able to continue to have meaningful conversion of incremental revenue into OBITDA as we go forward which will drive margin expansion.

The other thing I just want to point out is there are about six different businesses within that segment and some are frankly more mature and have more mature profit margin characteristics similar to what you may expect in peer groups and others are in hyper growth on the revenue side, and we have made investments, but they haven't begun to hit the profitability level, but we are going to start to see that meaningfully kicking over the next few years. So you also just have to consider the portfolio mix within that segment as well.

Tim Armstrong

One thing just to note if you are an investor in value click or one of the other areas, how do you actually count the gross revenue versus margins, those are $100 of spending and you are counting a 100 gross or whether you are counting – let’s say there is a 15% margin, you are counting the 15% as your gross and then you are taking a profit underneath that. What you are counting actually matters in terms of what's gross and what's net overall, and I think investors need more detail on that side, and we are happy to talk to them overall, but there are different companies in our space that count the gross margins and than what they are counting as margins in a different way.

Deb Schwartz - Goldman Sachs

And then just one quick one on Patch, can you just quantify what the losses were for Patch for 2012.

Tim Armstrong

We are not releasing that today, but they improved.

Operator

Your next question comes from the line of James Cakmak representing Telsey Advisory Group.

James Cakmak - Telsey Advisory Group

As you look to attract users across multiple platforms, can you just talk about some of the developments that we should expect to see on the mobile front, and then perhaps quantify some of the user metrics for mobile to help us understand what the contribution is from there. And then secondly, you are stepping up the marketing spend. In 4Q, you stepped it up and then probably more so into 2013. Can you talk to us about how you are balancing revenue and expenses related to marketing, and is the priority to jump start revenue and traffic at this time or more organic growth through the cross promotions between the segments.

Tim Armstrong

On the distribution side, we are probably going to give three-way answer here, but Artie why don’t you talk about distribution.

Artie Minson

Sure, the mobile, as well I can hit, because I do think mobile is very much a property by property analysis you have to do. We have some of our properties more in the tech side, we are --frankly we are seeing 50% of our usage on mobile; we have others that are frankly less than 10%. What we are really focused on is significantly improving the mobile experiences across all of the products, and to Tim’s point we are number four in mobile at this point. So we are pleased with our usage there. You know on the monetization front, it’s still lagging our usage, but it’s something also that we are working on. Can you just remind on-- the specific distribution question again was?

Tim Armstrong

How you are basically capturing cross platform?

Artie Minson

Yes, what we are doing there, what you will see more and more is on the desktop usage of our site, you will see driving people to download our apps and driving people to our different mobile experiences. And the other thing which we have been doing more and more is responsive design across all of our sites such that you have the same look and feel across all of the experiences, so what you are going to see is continued cross-platform promotion to drive people to mobile as well as a design, look, and feel that as you are across the properties on different devices that you have the feeling that you are living within the same brand.

Tim Armstrong

And maybe just one, I think one other thing we've been really good at is basically one brand, one experience. So, I think if you look at Mdot site, Tdot site tablets, plasma screens, I think we have one of the only fully integrated systems especially around video that basically hits mobile, tablets, desktops, and plasma there. And the second thing that's getting worked on deeply are, what I would call distribution partnerships the same way Wal-Mart works with Proctor & Gamble and in the lot of cases in the content business where Proctor & Gamble and there's a lot of people in Silicon Valley that are Wal-Mart. You know, we've done a good job of integrating that distribution system as well, and we're going to continue to work on that.

Karen Dykstra

Let me just hit the marketing question really quickly. I think what you saw in Q4 on marketing spend was a lot of different marketing programs. We did the one brand campaign sort of the central level brand campaign, but then we did a lot of smaller campaigns across the company, all directed at different purposes, including some international marketing spend, some of which were done purely for name recognition and to help with even recruiting efforts as opposed to the typical kinds of marketing for driving growth in UVs.

We did some initial production marketing in support of our new bundled subscription product in the membership group as well. So, it was a combination of a lot of different marketing programs and spends, some production, some brands, some will run and will continue to run in 2013 like the Bundled subscription campaign, and I think as we look at 2013, I think that our marketing spend would go down to more normal levels. We're not looking at doing anything extraordinarily different than we had in the past in terms of marketing.

Operator

Your next question comes from the line of James Lee, representing CLSA. Please proceed.

James Lee - CLSA

Tim, just want to follow up on mobile monetization, Can you maybe help us quantify a little bit about how much traffic is trailing on mobile, and how much of you revenue is currently from mobile. So help us on where the gap is, where the challenge is, and how you plan to close that gap? And secondly on the multi-screen cross-platforms stuff, your peers seem to have unique ID that can help them track across different screens, and by doing so, does it help at may be overcoming cookies can now be tracking in to mobile, and Tim, I guess from your perspective, what is your hook here as you go into the multi-screen type of environment going forward? Thank you.

Tim Armstrong

That’s a really good question, and I think it’s one that we are really focused on happy to answer. Basically if you look at -- we have said we have roughly 40 million uniques in the US, let me focus on the US for this. Ad revenue basically is up 350% year-over-year, we had about 46 iterations to our existing products on the consumer side, and then we put fairly significant investments into our advertising side, and I think the advertising experience on mobile in the way that we are going to monetize consumers, which I think we are doing a better and better job of is; number one build world class one brand experience across mobiles, tablets, desktop, number one.

Number two is to have formats and data around mobile that do a very good job of proving ROI proof points for advertisers, and specifically I think one of the advantages and where we are ahead in this space is we have a system that can run cross platform, desktop and mobile campaigns right now, and that actually sounds like a small thing, it’s actually a very big thing overall.

So, you should look to us to continue to put big investments into mobile from a consumer product standpoint and technology standpoint, and to follow that with things like we did with integration of Pictela on mobile format wise, with video on mobile format wise and things like the BuySight acquisition which are going to help. We are doing also a very good job of looking at how you use data on mobile to target people, and I think you hit on something that is very, very critical for the future of the ad business just in the industry overall, is what I would say the identity war, and the identity war essentially is happening where people are starting to really fight -- I don't want to keep plugging the Economist, but a great article on the Economist in Q4 about kind of the war at Silicon Valley over this.

And we are going to do very well in mobile because we understand the data of targeting and data of format very well, and we are actually able and have been working on cookie less targeting overall. Our content properties and our network are able to go to mobile fairly easily now, and we believe we are going to be able to target without cookies in the future and that is something that we already have been running tests on and are seeing good results on overall.

And I would just say the engagement on mobile is higher, the things we have invested on the format side in mobile are really strong – I mean video are strong than mobile.

James Lee - CLSA

And then on the revenue piece, as it relates to mobile, as I was saying, it’s really hard to look at it as a aggregate number or percentage of revenue, you have really got to go into the property by property level, you take AOL.com, less than 10% of the traffic is on mobile at this point, but if you look at the tech [round] turning gadget, you can get 50% of the traffic on mobile. So, we are not breaking out the percentage right now, it obviously lags the overall usage which is the gap we are trying to close, but really it is a property by property, it is the most appropriate way to look at it.

Eoin Ryan

It’s time for one more question, operator.

Operator

At this time there are no further audio questions.

Tim Armstrong

So, I am just wrapping up for 2012, I want to give a very large shout out to the investors and the team members at AOL. I think we have walked through the valley of the turnaround and gotten to growth, and it has been an incredibly difficult challenging operation, but we all believe AOL is a powerful brand and as other brands we have in our portfolio, we’d become a company, a brand portfolio of companies that represents some of the strongest brands in the strongest spaces.

I wanted to close the call on a note which I hope you will all watch. We have a partnership with PBS around a property called Makers.com. If you have a mom or a wife or a sister or a daughter or a cousin or anyone in your family, and you want us to help close the gender gap in the United States, we've invested alongside Kunhardt McGee and our team internally has built Makers.com, which I think is one of the best properties in the world about women for the world.

There's a premier of the documentary on PBS on February 26. It’s a three-hour documentary. I hope you watch it. I think it’s a game changing look at the future of the women’s space overall. We had a premier this week, 2400 people showed up at Lincoln Center, and I think everybody who is touched by that piece of content and property has a different viewpoint on the world, and I hope you will watch that overall. Thanks for sticking with us. We are not stopping. We are going to keep hustling, and we will see you on the next call. Thanks.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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Source: AOL's CEO Discusses Q4 2012 Results - Earnings Call Transcript
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