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AOL (NYSE:AOL)

Q2 2014 Earnings Call

August 06, 2014 8:00 am ET

Executives

Eoin Ryan -

Timothy M. Armstrong - Chairman and Chief Executive Officer

Karen E. Dykstra - Chief Financial & Administrative Officer and Executive Vice President

Analysts

Ross Sandler - Deutsche Bank AG, Research Division

Brian J. Pitz - Jefferies LLC, Research Division

Ronald V. Josey - JMP Securities LLC, Research Division

John R. Blackledge - Cowen and Company, LLC, Research Division

James Cakmak - Telsey Advisory Group LLC

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Mark S. Mahaney - RBC Capital Markets, LLC, Research Division

Eric James Sheridan - UBS Investment Bank, Research Division

Kenneth Sena - Evercore Partners Inc., Research Division

James Lee - CLSA Limited, Research Division

Thomas Cauthorn White - Macquarie Research

Operator

Good day, ladies and gentlemen, and welcome to AOL's Second Quarter 2014 Earnings Conference Call. My name is Stephanie, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference 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 and Corporate Communications. Please proceed.

Eoin Ryan

Good morning. Thanks, Stephanie and everyone, for joining us for our second quarter 2014 earnings call. You can find our Q2 earnings press release and accompanying slides and trend schedules on our Investor Relations website.

On the call with me today is our Chairman and CEO, Tim Armstrong; and our Chief Financial and Administrative Officer, Karen Dykstra. We'll make some brief remarks on the quarter and on our overall strategy and then we will open it up 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 expectations for the economy and online advertising in general. These forward-looking statements typically are preceded 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 future performance. Some of these risks have been set in our annual report Form 10-K for the year ended December 31, 2013, filed with the SEC.

All information discussed in this conference call is as of today, August 6, 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'll refer you to the press release in the Investor Relations section of our 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.

And with that, I will turn it over to Tim

Timothy M. Armstrong

Thanks, Eoin, and thanks everyone joining the call.

AOL had a strong Q2. Our global team continues to transform AOL into a media technology company of the future. We have been able to move AOL back to industry-competitive growth by doing 2 important things. The first is setting a clear vision and an operational structure. We continue to believe that moving AOL into the center of the mechanization of the global media and advertising business will offer our talent, consumers, customers, partners and shareholders a differentiated and exciting opportunity to grow. In many respects, Q2 is a great example of our ecosystem showing growth driven by the future of media technology.

The second is because of our single focus on mechanizing platforms and brands, AOL has become meaningfully faster, leaner and more competitive. Our Q2 results are driven by a global AOL team that has just under 30% fewer employees than we did just over 4 years ago.

Q2 is the sixth consecutive quarter of revenue and OIBDA growth for the company. During Q2, revenue and OIBDA grew at double-digit rates, and we strengthened our areas of strategic focus and investment: video, programmatic ad platforms and premium content.

Many areas within AOL had strong performance during Q2. At AOL Core and our content brands, AOL.com, time spent per visitor, video views, revenue and pricing all grow at double-digit paces.

On AOL Mail, revenue and pricing also grew at a double-digit pace.

The AOL Membership team improved the product offering and ARPU grew 4% in Q2.

AOL Search returned to growth through improved consumer experiences and more effective partner marketing.

In the content business, we also had some strong areas of growth. AOL Core and our content brands had multi-platform user growth at 18% year-over-year, which was the fastest growth of the top 5 Internet companies.

The Huffington Post has over 97 million cross-platform global users, and The Huffington Post mobile Web grew UVs at over 200% year-over-year, and we ended Q2 with 48% of Huffington Post readers and traffic are now outside of the U.S.

The AOL Lifestyle brand remained #1 in the category and grew cross-platform usage by 20%.

TechCrunch had its fifth TechCrunch Disrupt in New York with over 2,000 attendees and 1,000 people participating in the Hackathon. On top of that, we had the cast of HBO's Silicon Valley show up, and it was a big hit both in terms of TV and the Web.

MapQuest grew total users and usage in June for the first time since 2007.

And MAKERS officially launched in China with Sun Media and Her Village, and we are continuing to launch more women's leadership platforms.

In video, AOL is a top 3 player. We're top 3 in total videos, video viewers and video views.

Impressions, ad pricing and campaigns all grew by double digits year-over-year.

From our video NewFronts in April, we have sold half of our productions in the U.S. and the entire set of productions in Canada. We also received 2 Emmy nominations for the productions.

AOL On is now on 15 OTT devices, including Apple TV, and you can see it at 30,000 feet on Delta Airlines as part of their in-flight programming.

HuffPost Live continues to grow and has surpassed 1.4 billion video views since we launched it.

In the Platforms area, we continue to be a leader in the mechanization of marketing and advertising. AOL Platforms grew revenue 54% year-over-year; programmatic ads grew at over 100% year-over-year; and our ad pricing was up very strongly, growing double digits.

In Q2, 34% of our advertising business was programmatic versus less than 5% a year ago.

Our advertising sales team also continues to play a leadership role in the industry. We worked with 20% more advertisers in Q2 year-over-year, and 53% of the clients are running cross-screen-enabled campaigns. Also, business from the top 6 holding companies globally grew.

For the second half of the year in 2015, we have a clear set of priorities. At AOL Core, it's to improve and build the AOL Core Service into a global all-screen curator of utilities and information.

With AOL video, it's to scale our video stack from branded content to syndication to our video marketplace.

In the Platforms area, it's to continue to scale our complete programmatic advertising stack called ONE by AOL. We recently announced the addition of Havas' global digital agency to the customer list of ONE by AOL.

We also added significant assets to our strategy with the acquisitions of Convertro and PrecisionDemand. Convertro is at the forefront of the attributions model that will reshape the measurement of omni-channel advertising, and PrecisionDemand opens up Adap and ONE by AOL to linear TV space.

For our global content brands, we have asked The Huffington Post and HuffPost Live to work on the next generation of those products, and we expect to have multiple updates to those products to stay at the forefront of news information, both globally and in video.

With TechCrunch, CrunchBase and Engadget, those are also areas we're expecting to scale and transform our offerings. We see the global tech market having expansion opportunities, and we expect to capture a larger share of that opportunity.

In global women's and business leadership, there's another area of focus and expansion. Following our investment in MAKERS, we see opportunities to partner more and to more deeply go into the ecosystem of women's brands and startups.

The company has a precise set of operating goals to accomplish by the end of the year, and we have a matching set of goals to continue to simplify our operating structure globally. We expect to have an active Q3 and Q4 in the launch of products, the addition of talent and the building of the AOL culture and brand. The industry is changing at an accelerating pace, and we plan to continue to change AOL at a pace faster than the industry. Karen and her team have done a great job strategically organizing our resource allocation and financial structure, and I want to turn the call over to her. Karen?

Karen E. Dykstra

Thanks, Tim, and good morning, everyone. As Tim just said, Q2 was strong with the accelerating double-digit revenue and adjusted OIBDA growth. Our improved results were driven by strong underlying trends in video, inventory pricing and programmatic, all areas where we have allocated our investment in recent years, which is great to see. And it's worth repeating that this is our sixth consecutive quarter of revenue and OIBDA growth. We are consistently improving and laser-focused on prioritizing our investments and allocating resources towards our highest growth opportunities.

The consolidated revenue grew 12% year-over-year, driven by 20% growth in global advertising revenue, including 60% growth in Third Party Platform revenue. We're really pleased with the acceleration of our revenue growth, and I'll touch more on revenue as I talk through the segment results.

Starting with the Brand Group where results for the quarter were negatively impacted by $15 million from properties that were shut down or deemphasized since the prior year period. Excluding the $15 million, Brand Group revenues grew 6% on 4% growth in display revenue and 10% growth in search revenue. Display revenue growth came from continued double-digit inventory pricing growth and based primarily on the increased sale of premium formats, including video, across the breadth of our properties.

Adjusted OIBDA for the Brand segment was $13 million in Q2, a significant year-over-year and quarter-over-quarter improvement. Our performance has improved due to the focus on fewer brands and higher inventory pricing from premium formats. The year-over-year OIBDA improvement should continue through the remainder of 2014.

AOL Platforms had an exceptionally strong quarter, growing revenue 54%, driven by 60% growth in Third Party Platforms revenue. Adap.tv again contributed significantly in Q2, and growth was also very strong, excluding Adap.tv, which was up about 20%. We are seeing real strength in this group, both from the assets we have built internally, ALP and MARKETPLACE growing over 100% year-over-year in Q2, and from the assets we've reacquired over the past year. It's important to note that while we continue development of ONE by AOL, which is our open cross-screen and cross-format programmatic ad platform, we're gaining strong adoption and traction with our current display and video offerings across desktop, mobile and TV, and we're adding more advertisers and publishers into our ecosystem.

Third-party revenue, net of TAC, reached 65% with a 37% margin. We are super focused on growing revenue net of TAC and in maintaining our margin. Non-TAC expenses are also focused and have increased almost entirely from the acquisitions in the past 3 quarters. As we grow our programmatic offering, these expenses should not grow at the same pace even as we continue to invest.

For context, our investments are targeted at: ONE by AOL, which I just mentioned; international expansion; and also video, in branded content to syndication through our video marketplace. While we continue to invest in this business, we expect to be profitable in the second half of the year and beginning in Q3. We expect margins to improve even further in Q4 during the seasonally strong period.

In the Membership Group, revenue declined 5% year-over-year with growth in segment display revenue, offset by declines in subscription revenue.

Membership display revenue grew during the quarter driven by a strong quarter for AOL Mail. The rate of decline in subscription revenue fell from 10% in Q1 to 7% this quarter due primarily to a 4% increase in ARPU, reflecting the benefits of a price increase during the quarter. Churn ticked up slightly as a result of the price increase, but it is in line with our expectations. Membership adjusted OIBDA margins remained very strong during the quarter at 70%.

Turning over to profitability. Adjusted OIBDA growth accelerated to 12% year-over-year in Q2, driven by revenue growth and expense management with the latter occurring even as we continue to invest in key areas within our brands, video and our programmatic offering.

I want to spend some time talking to our cost of revenue line. I think it's best to break this line out by TAC and other cost of revenues. When you do this, you'll see that growth over the past few quarters has been driven by growth in TAC expense related to the growth in our Third Party Platform and not due to a broader escalation in operating costs. In fact, the opposite has been the case and non-TAC cost of revenues actually declined year-over-year in Q2.

When analyzing TAC, it's important to match the appropriate expense with the appropriate revenue, and you should compare Third Party Platform TAC, which we break out for you on the bottom of the P&L and in our trending schedules, to Third Party Platform revenue. And as I just mentioned when talking about platforms, the net revenue margin here is typically in the mid-30% range. The majority of the remainder of the TAC relates to our search marketing-related efforts, which results in about 15% to 20% net margin revenue.

Further down the P&L, operating income, net income and diluted EPS reflect increased amortization of intangibles and stock-based compensation expense related to recent acquisitions. The current level of expense for both of these line items is a good proxy for the remainder of the year.

We made significant progress in Q2, and we remain confident in our ability to deliver at least $500 million in adjusted OIBDA for the full year. We believe there is likely some upside from that level, although we will continue to review all investment opportunities and make decisions for long-term growth.

Free cash flow for the quarter was $88 million. AOL continues to generate a significant amount of cash on an annual basis, which provides a good deal of flexibility for us. Additionally, considering losses in tax credits from prior years, we do not expect our cash tax payments to materially impact our cash position through the end of 2015. This will have an obvious positive impact upon our future cash flow and cash position.

Turning to the balance sheet. We ended Q2 with $136 million in cash and equivalents and $145 million remaining available on our revolving credit facility. As you saw in the release, in July we entered into an agreement to sell a tech center in Virginia for approximately $33 million, and you'll see that amount classified as held for sale on the balance sheet at June 30. The transaction has now closed, and we received the funds on July 30. On August 4, we paid down $30 million of outstanding balance of our revolving credit facility, reducing our balance outstanding to $75 million.

Finally, we repurchased 1.6 million shares at an average price of $36.84 or approximately $59 million in aggregate. Additionally, on July 28, AOL's Board of Directors authorized a new share repurchase authorization, bringing our current share repurchase authorization to $150 million.

To conclude, we ended the first half of 2014 strongly, growing year-over-year at an accelerated pace from Q1. Through the remainder of the year, we will continue to execute our strategy while investing with discipline in our people, products and technology.

And with that, I'll turn it over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ross Sandler with Deutsche Bank.

Ross Sandler - Deutsche Bank AG, Research Division

I just had 2 questions. I guess one for Tim and then one probably for Karen on Adap. So Tim, on display, the growth rates here are holding up much better than your industry peers', and you have just as much exposure to premium display. So can you just talk about what you guys are doing to sustain that growth? And do you see this as a likely trajectory for the next couple of years within your display business? And then, Karen, on Adap, can you give us a sense of what the kind of organic year-on-year growth rate for Adap looks like? Specifically, if you kind of gross up the eliminations, what is the business growing at? And do you expect that growth rate to be maintained in the light of some larger platforms moving into the kind of programmatic video space later this year or next year?

Timothy M. Armstrong

Basically, there's fairly simple set of things that we do on the ad pricing side, and a lot of it has to relate with kind of core fundamentals within the business. The first is basically, I think, understanding the areas withinside the business of where commoditization has happened and where it's not happening. And I think we have focused on basically providing value to advertisers and publishers in a non-commoditized way in terms of the format types and the targeting types that we use on the advertising business. And I think if you talk to our customers, they would say that AOL actually does a very good job of returning ROI. So the basic formula of ad pricing is are we able to deliver value to advertisers and consumers in a differentiated way. And the answer to that question is yes. How we do that, the kind of tactics behind that, one is -- and again, I think we sort of set the table for this a few years ago, was to recognize that the way that ads were getting done online weren't great for consumers, so we started to invest in things like Project Devil and other premium formats, which was the first leg of that, which basically is the higher priced advertising that have higher ROI for both the advertiser and consumer. The second pillar has been around video. And video is something that's been really important because video basically uses the same inventory area but allows us to do it in a much deeper consumer insight way and targeting way. But also, the advertisers are willing to pay more for it. And then the third area is mobile. And I think one of the areas in mobile that we did a really good job at a couple of years ago was to start integrating our mobile and desktop offerings, and now it includes OTT together. So we're able to basically do a full suite of services that reach video premium formats and to really transition our inventory to a much greater extent to the non-commoditized areas of the marketplace, one. And then the second of all this is our programmatic advertising, which has gone from 5% to 35% in one year, which I would point out is a very significant industry shift overall, probably one of the largest shifts in the last 20 years just in terms of its structural change inside the Internet. We've done a very good job on the bleeding edge of that and also private marketplaces and some of the areas that we've invested in. So advertisers are not out saying they want to spend less. Advertisers are out basically saying they want better ROI and more connection with consumers and more ability to target. And we have done a, I'd say, an exceptional job. If you look at us versus the competitive set in some of these areas, we've done an exceptional job, and our team deserves a lot of credit that works on this as well. So I'd say that's ad pricing overall. We're going to continue to really focus on that as one of the areas that we improve overall as a business.

Karen E. Dykstra

All right. Great. Thanks, Ross. Great question. We want to make sure that it is clear about Adap.tv. The growth rate is north of 60% on Adap.tv, taking into account all of the intercompany eliminations. You can't do the math without taking into account the impact of the intercompany revenues within the group. So north of 60%. I would say really pleased with our progress at Adap.tv. And yes, I do expect it to stay in that range.

Operator

The next question comes from the line of Brian Pitz with Jefferies.

Brian J. Pitz - Jefferies LLC, Research Division

Tim, maybe you could give us a sense of how your overall video strategy is fitting together. Given that you're focused on everything from creation and curation to distribution and modernization, how do you effectively manage all this? And separately, any updates on where you are in terms of the progression of your barbell strategy? I noticed that you mentioned 35% of the business is now programmatic. So maybe just an update there.

Timothy M. Armstrong

Sure. Thanks, Brian. So basically, our video strategy, again, very simple, which is -- has 3 components to it. One is original programming that we do ourselves, and we just got nominated for 2 Emmys. So the team is doing a very good job on that piece of it. And we're partnered with some of the world's best creative people. The second one is our syndicated business, where we basically have piping. It's similar to the TV business, almost like affiliates where we have affiliates all over the Internet that take video content and advertising from us. And we partner basically to put together, I think, the highest quality video library for ad-supported content in the world and work with most of the major cable companies in the world and a lot of the major online players as well. And then the third part of our kind of video stack is the video marketplace, which got a huge enhancement when we acquired Adap.tv last year. And that part of the marketplace is now spanning linear TV all the way through mobile for video and is really a business built on putting the value at the edges of the marketplace and making advertising as easy as ecommerce in the video space. And if you think about our kind of large pillars of the video strategy overall and you look at our results today, there's sort of a 1-for-1 matchup between the strategy and the results, and we're going to continue to focus on video. I believe video, as a macro statement over the next 4 to 5 years, is going to really change the core infrastructure around the Internet, and sight, sound and motion will become more and more important in all aspects. So we're excited with what we have for our platform now and excited for where we're going. And then there's other areas like the HuffPost Live, which are big brands and big products that are doing live video content that are important. So we have multiple things there. And then just one quick sidelight on this also. If you saw the GM article on The Wall Street Journal where we did the GM unboxing campaign, that stretches across our video network Premium Format. So we're integrating video into everything we're doing. The second piece is the barbell. And the barbell -- and for the -- just a quick reminder for those of you who maybe are hearing for the first time, is the barbell strategy is something that's kind of taken hold in the industry at large, but it's our strategy around having machines and programmatic on one side and really deep, rich content on the other side. And the ability for us to do the GM unboxing campaign was the ability for us to do a live content feed with General Motors on the advertising side and then to be able to pump that through the programmatic stack and distribution network we have overall. So you're mixing basically what we call internally culture and code, the best content around one side of the barbell with the best code and ability to scale it on the other side as well.

And then in the content businesses, let's say TechCrunch as an example, TechCrunch is a great content property. Underneath it, we also have CrunchBase, which is a code-driven, scalable platform. So what we're really looking at the world is how do we build the best content experiences for content and advertising, and then how do we have the most scale in terms of the programmatic targeting, planning, buying, analysis of media on the other side. And we think that barbell strategy is a very, very powerful strategy for us.

Operator

Your next question comes from the line of Ron Josey with JMP Securities.

Ronald V. Josey - JMP Securities LLC, Research Division

I wanted to ask on programmatic and ONE by AOL specifically. So I think there's 2 charter members now with Havas recently being added. Can you help us, Tim, understand the timing here? I believe the launch is slated for 2015. And maybe the marketing plans around it, once the product is launched, to drive new users. And then a quick follow-up to TAC. I think, Karen, you talked about TAC as a third party, maintaining margin here perhaps in mid-30s, yet TAC as a third-party -- presumed third-party revenue declined 200 bps quarter-to-quarter. So do you believe this lower overall TAC can continue? I think you mentioned that in your opening remarks, but can you help us understand why TAC can continue to improve here?

Timothy M. Armstrong

Great. So the one update is basically, there's this -- there's the following kind of step functions to think about ONE. Today, all the components of ONE are working, and we're selling them and working through. They happen to be on a couple of different systems now, but basically if you go from linear TV all the way through mobile, all the aspects of ONE are basically things that are live in the marketplace and we're working on. The second piece is that inside of ONE, the components -- and we already had the first launch of the component of ONE already, and we're working towards the 2015 total launch of ONE, but the reason you're seeing customers announce that they're adopting it or able to sell it in the marketplace is because we can actually make it work already and that the kind of version 0.1 or so of it or version 1 is kind of already out internally and we're working on it.

The second piece is, I would just say, at a macro level. If you look at our results today, the fact that programmatic is up over 100%, so we're taking share in the market. We're growing much faster than the programmatic marketplace is overall. So the ONE launch will be when we fully get to the ONE system. But if you look at all the subcomponents right now, the subcomponents are growing much, much faster than the marketplace overall. So you can consider ONE working today, it just has more components. It'll go to down to a ONE system in 2015 overall. And I'll -- Karen, if you want to handle TAC.

Karen E. Dykstra

Yes, the other question was about TAC. And yes, we were really pleased this quarter with the margin net of TAC in the Platform space. I think you should think about it as it will be in the mid-30s. I wouldn't count on 37% each quarter. I think it'll bounce around a bit quarter-to-quarter depending on the mix of the campaigns in the different businesses. We have an end-to-end platform. We have a premium product with inventory, premium inventory. We continue to focus on quality and volume, and I do think that we should think about it as a continued mid-30s range.

Operator

Your next question comes from the line of John Blackledge with Cowen and Company.

John R. Blackledge - Cowen and Company, LLC, Research Division

Just 2 questions. Tim, maybe can you discuss the competitive positioning for Adap.tv and how the business may be impacted given Facebook's recent acquisition of LiveRail, if at all, and other competition for Adap.tv? And then on programmatic for linear TV, what type of ad inventory is going first in linear TV for programmatic? And how much linear TV ad inventory will be served via programmatic over the next few years?

Timothy M. Armstrong

Sure. So John, the competitive positioning, let me just give you a zoom out of AOL for a minute and let me tell you what I think is happening in the industry writ large and then maybe how it affects Adap and AOL. One is, you're seeing both on the client direct side and on the global holding company side the build-out of what I would say is the multi-platform world. And one of the large holding companies right now, I just met with one of the regional CEOs last week, is they're building out programmatic teams that are going to work with multiple programmatic systems. Then again, realizing that all of these customers, both the direct clients and agencies, have all -- or many of them, the top people, have announced intentional goals for shifting their money to programmatic, so number one is, everybody is organizationally and structurally setting up for a world where they're going to work with multiple programmatic systems from multiple supply sources with multiple metrics and analytics behind it overall. So that's a net positive for everybody, AOL, Facebook, everybody. When you zoom down into AOL, the positive areas and the -- both on the supply and demand side are the following. One is, we bring a differentiated product to the marketplace. When we went out and bought Adap, we looked very seriously at a lot of different players in that space, and we chose Adap because Adap was the only true platform that added value on both sides of the marketplace, supply and demand. So I believe Adap is still, and with innovation that's happening in linear TV, the best product in the marketplace. And as you guys have seen from Internet history, best products win even in the face of mounting competition. And so AOL, basically our focus on having Adap connect to linear TV all the way through OTT through mobile has been -- the reason you're seeing us grow quickly and Adap is growing quickly is because of the strength of the product in the marketplace. We're also big partners with Facebook overall. So I think Facebook specifically getting into the market is actually going to help the marketplace grow overall, and I expect us to be strong. When you -- so net-net, this market is growing. Structurally, it's getting set up to grow, and we have one of the strongest products and supply chains in the marketplace. We're going to do well. The question about linear TV, as with most of these developing marketplaces, what's happening in a linear TV marketplace is the inventory that is least valuable to the cable channels is getting taken first into the linear TV programming, and what will happen over time, which has happened in multiple industries within the Internet industry, is I believe that over time, there'll be ultimate yield management where the linear TV players are working with the digital platforms to basically optimize yield. And in that scenario, we have one of the best yield systems, and PrecisionDemand only adds to that, the acquisition we made. So I'd expect linear TV over the next 2 to 3 years to move much like the beginning of the Internet did where there was a few couple of years of growth, where people were testing and growing, and then hitting inflection points where there's a lot of inventory and a lot of demand on those systems. So I'm personally bullish on linear TV opportunity in the future, and I think we're off to a good start in that area overall.

Operator

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

James Cakmak - Telsey Advisory Group LLC

Tim, I wanted to go back to your comments on LiveRail and Facebook. And just taking a step back and looking at the broader social ecosystem as a whole, we've seen a lot of traction from these large social networks, increasing -- pushing into video. But with that in mind, can you talk about the value proposition, and I guess more focusing on the targeting capabilities, versus the social networks as they deliver more video ads at scale? And then secondly, I appreciate all the additional TAC information that you've been providing for third party. And as we look forward, and you guys have consistently talked about the tech TACs in the industry as that LUMAscape consolidates, so can you provide some insight into how we should -- or into your ability to be shielded from this margin erosion as we model out the platforms business? ROI is a factor. You've reiterated the mid-30s, but industry peers have also talked about rates south of where you are now. So just help us get comfortable with that mid-30s.

Timothy M. Armstrong

Sure. So on the macro picture, again, here is that many publishers and many advertisers are getting hit with what we call the tech TAC, which is they may have 50%, 60%, 70% of their potential revenue getting taken out by the marketplace by point solutions overall. And our premise and probably other people's premise has been to remove some of that tech TAC to allow value to go to the ends of the marketplace, so the supply side and the demand side. When you get into the demand and supply side, there's very important things to recognize and notice. One is by working with a complete ADTECH Stack like an AOL. They're instantly going to get better ROI in terms of how they're running their ads across the platforms. The second piece, which is important, is many of these players are, again, what I said before, optimizing for a multi-platform world. And within that multi-platform world, ROI matters a lot and people will pay for results. And I think if you look across the online space in general, not just the media and advertising space, when you look into ecommerce and those things, the take rates in a lot of those businesses, some of them have remained very strong over time over the last 10 years. And the reason that they've remained strong is because of the value that gets created in the ecosystem in general. So I -- from an outsider's perspective when you look at these spaces, you tend to think about the take rates and the margin rates overall, which are important. When you get inside industry, what customers really want to work on is their ROI and who's going to deliver the most value to them overall. We've been able to basically deliver very, very clear value over a long period of time to these players, and I think from a tech TACs percentage, we're doing a good job of providing value at a much lower rate than currently they're probably paying in the marketplace. And then the second piece I would just say is with video and social networks and people getting more engaged in video, again we all tend to look at the online business as the main focus here in general. But the rising boats are going to lift all tides. It's really important that you see that consumer usage is going from a couple or a few billion people to 4 billion, 5 billion, 6 billion people coming online. So there's going to be massive demand increase on the consumer side. You're seeing basically the transition of the multi-platform video world happening. There's going to be much more content and many more people on that content. And on the advertising space, the advertisers need to transition their kind of formats from just the TV landscape on sight, sound and motion to their overall industry. So inside the industry, you can look and say, "Oh, there's more people jumping into the space." But the reality is the people jumping into the pool are much fewer than the size of the pool overall. And that pool is going to be explosive over the next decade, and that's why I think we're in a very, very strong position in the marketplace, both with our platform and with the ROI we're delivering to our customers. And we're excited about how big the pool is going to get overall.

Karen E. Dykstra

And I would just add on. I think it is what Tim just said about where we are, how we're positioned, who's providing the most value over time. And I would also point out that right now, we're at the lower end in terms of take rate in certain areas. And given that we are a complete stack, we feel really good about that position.

Operator

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

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Tim, I was hoping you could comment on a couple of topics that are getting a lot of attention these days. First, there are a number of industry players that have been reporting that the issue of non-human activity is particularly acute in the video realm. I'm wondering if you're seeing this impact market or confidence when it comes to taking more money or putting more money in digital video channels. And then secondly, I was hoping you could comment on this trend of marketers taking management of programmatic duties in-house. Does this have any impact on AOL? And how are you positioned there to help them in that process?

Timothy M. Armstrong

Sure. So basically, inside of the inventory pools on the Internet, which is, again, not different than probably any other, whether it's payment transactions or anything else, there are a number of people always trying to do nefarious things, and I think that's part of the world we live in right now. I think we have not only recognized that but stepped in the leadership role. We're co-leading the IAB group on basically making sure that there's the highest level of potential transparency for all advertisers and just in terms of knowing what those issues are. The second piece is actually putting in very, very significant investments and resources into the business in terms of making sure that our inventory pool is the best inventory pool online. And during Q2, I would say one of the things that we actually got positive kudos for is some of the larger players in the industry from the advertiser side, basically there's a number of companies that try to measure supply chains and how well those supply chains are dealing with any fraudulent inventory. And I think what happened was -- well, one of the instances we found is that our systems were more stringent than the actual companies working on that side of the inventory. And from a measurement and setup standpoint, our systems were as sophisticated or more sophisticated than the companies that are measuring that space. So I feel really good about the proactive stance we've taken on this, and I feel really good that our company has our hands attending to -- on that inventory issue. And I would also say basically at this point, we're running at about 97.7% or so on the AdSafe Index in terms of what our inventory is rated at overall. Look, we'd love to get that to 100% and we're constantly doing. But at 97.7%, we're one of the highest players in the industry. So I'd expect, just like the start of the Internet to where we are with kind of the start of video, it's going to shake the people out who are serious about this and shake the people out who aren't serious about it, and we're serious about it overall. The -- so -- and I think from a confidence standpoint, the advertisers are pretty confident that companies like ours are doing a good job of it, so they're continuing to be bullish about their spend. On the programmatic changes in the marketplace in terms of the systems build-out, the kind of sub-mega-trend underneath the programmatic trend is that the client side of it and the agencies are getting organized around their data. So if you go back 2 years ago, there was a lot of data companies that were third-party data that were superhot. A year ago, basically people, the clients, directly started to really think about how about to organize their own data. Now when you think about where we are right now, at the cutting edge, basically you have the following construct, which is our clients are trying to own their data and their data relationships overall and to take their first-party proprietary data and work with second- or third-party data providers or targeters. The agencies are very quickly ramping up their capabilities in this space overall and working both with the clients' data and then their cross-platform data, and then the publishers like us and platform providers are basically using our first-party data and trying to help optimize their client data as well. All that being said, I think the trends that you can expect in the marketplace is that you will have the largest 100 advertisers over the next 5 years with data solutions internally, and those data solutions internally will be plugged into both the agency community and the publisher community at let's call it 5 to 10 platform players who are able to enhance the targeting and the formats and the ROI and ROI for those customers. So you can expect clients to invest in their own systems, you can expect agencies to invest in their own systems and places like us to invest in our own systems. And then there will be socket plug-ins for each of those systems overall, and we are currently building both our socket for people to plug into and our prongs that we can plug into other people's sockets. And we are in a very, very strong and central position to do that.

Operator

The next question comes from the line of Mark Mahaney with RBC Capital Markets.

Mark S. Mahaney - RBC Capital Markets, LLC, Research Division

Let me switch over and ask about the subscription business. Tim, as you think about that business going forward, can you -- any details on maybe some new products or services, subscription services that might be incremental growth drivers? And then I don't want to make -- that churn that kind of slightly ticked up, and I know there's always quarterly fluctuations. Is there any particular reason why we should or should not be concerned about that sequential increase? Is that just seasonality? And is this kind of level of churn what to expect going forwards. Or should it continue to kind of come down as it has been over the last few years?

Timothy M. Armstrong

Sure. So let me start out with the churn first and then I'll -- we'll go into the new subareas. So Mark, the -- basically, there's 2 aspects on the churn. One is we had a pricing increase, which we do generally yearly overall, and that kicks churn up a little bit. The other thing -- so I think we're basically -- we model that very, very closely. So we are basically on plan for what we expected to have happen in that business. The second piece is at the beginning of Q2, we had announced the fact that we were working on security issues and making sure that our security area was safe. And one of the things that we really decided to do, which I think was smart, was to shut our marketing off in terms of the subscription business overall. And that's a choice that we could have kept the marketing on. We did a good job. We have done a great job on the security front overall, but we made a decision as a company to basically be very careful with the users. And while we were working on the security items, we decided to shut marketing off and the kind of upgrading of any of the subscribers over time, which, I think, on a churn factor made churn look like it was going up. But in reality, I think what we're doing is just being careful about the business, and I believe that was the right decision overall. So we're not overly concerned about the churn rate, but the price increase churn is on plan. And the marketing shut-off, we knew would happen, but we felt like that was the right thing to do at the time period overall. In terms of the new subscription businesses, we did add a fair number, tens of thousands of new subscribers and new things that we are testing in the marketplace, and we'll have more to talk about there at the end of the year. But our teams have done a very, very solid job of really starting to test solutions in the subscription area. Safety and security is a big area. Customer service is a big area. And we review on a regular basis the new subscription products, and I think Karen and I are both very happy with the level of innovation and thought going into subscriptions. And I would hope in 2015 that we are stronger and stronger and stronger in terms of off-access subscriptions, but we added tens of thousands of people, and we're watching that very closely and I think we'll continue to work on that. We're -- we continue to be excited about the subscription business in general.

Mark S. Mahaney - RBC Capital Markets, LLC, Research Division

Tim, do you think there's a point at which subscription revenue could grow again at AOL in the next 2 years?

Timothy M. Armstrong

I -- we've said this consistently, Mark, is we probably share the viewpoint with you that, that should be our ultimate goal. But I think we also are realistic that people are not buying access subscription at the access store that much anymore for dial-up. People still are but not in huge droves. I think it -- in a very simple way, I think it's going to come down to us unlocking the -- let's put it this way. We have the right people, we have the right subscription platforms and we are very good at direct-marketing subscription products and services. As we improve the products there, I would sure hope that we get to the point where subscriptions are growing again, and that's our goal. Can't promise it, but that definitely is something we have our hands at again at 10 and 2 on overall.

Karen E. Dykstra

Yes. I would add my confidence in the team. I think it is something that should be our goal and are -- and we're confident and see the progress. We've got an A-plus team there that has done amazing things with the marketing and subscriptions, and I think -- and you see in the results this quarter, although not subscriptions, the improvement in Mail and display revenue on Mail that we saw on the Membership quarter. Our Membership results this quarter was equally impressive. Also same team. So I would share Tim's comments.

Operator

You next question comes from the line of Eric Sheridan with UBS.

Eric James Sheridan - UBS Investment Bank, Research Division

First, for Karen. Maybe in the language you used around the EBITDA guidance for the full year calling out likely upside, when we look at the improvement in the first half of this year over last year and then the normal seasonal impact in the second half, wanted to tease out a little bit about the investments that might have needed to be made versus the normal leverage and improvements you see second half over first half in EBITDA? And then, Tim, I think it's been about 3 months since you launched native advertising in mobile formats. I want to see if you could give us any update on how that might be going with partners and the impact on pricing.

Karen E. Dykstra

Sure. So to be clear, I said there is likely upside in our guidance, and I think it's important to note we're a growing company. It's best not to quantify specifically right now. We clearly had a good quarter, and we clearly continue to invest. We'll continue to manage the business and evaluate the best way to execute over the rest of the year. I think we've done a great job so far covering the impact of the early acquisitions that we had this year and delivering solid results around that. We continue to invest in the areas that are the highest growth. We've talked about them in terms of programmatic and video and continue to invest in customer, one, international expansion in the platforms group and specifically, I think I mentioned earlier, the video, from the creation with the slates to the ultimate syndication and monetization. So we'll continue to invest along those lines. As I said, I think there is upside in the guidance, but we would like the flexibility to manage the business and evaluate, as we do all the time, the best way to execute over the rest of the year to deliver the best long-term results.

Timothy M. Armstrong

And then I would say on the native ads area for mobile, the biggest kind of multi-step process on mobile has been to pull the ability for budgets to go from desktop to mobile to OTT. So mobile fits right into the overall larger budgetary pool, which we've done. The second piece is the formats that have happened, and we have some standouts in that area. One standout is just our ads product team, which has consolidated down our ads products to a much simpler set, including native. And then our content brands have done a nice job, like our Huffington Post has done a really nice job with native advertising overall on mobile. And I think as a company, something we're paying close attention to, the mobile opportunity continues to be very, very large and significant, and the dynamics between a normal user on desktop and a normal user on mobile really require the ability to have native ads work well on mobile. And if you look at most ads on mobile right now, it probably leaves you uninspired. So we see big opportunities for -- like we did with Devil on desktop, to really the change the game in terms of formats for native on mobile but to run them cross-screen. So I think mobile interest, mobile pricing, mobile private marketplaces, mobile programmatic are all things that are strong and offer a big, big, big opportunity for us. I think the industry has a gap in monetization on mobile right now, but that -- you can either look at that gap in 2 different ways. One is negatively because there's a gap, or positively, the fact that there's a massive amount of value to be created in that gap, and we're very focused on the creation of that area in that map. And I think the second things are things like Convertro and some of the attribution modeling we've done. We're really going to be able to show a very, very, very big push in terms of the mobile-enabled results, much -- multi-touch attribution and some of those areas. So everything we're doing right now is m.dot enabled. Our system, ADTECH Stack, is those things, and it's really, really important for us. And we want to throw dirt in that hole. I mean, we want to fill that gap up, and that's a big, big, big opportunity.

Operator

Your next question comes from the line of Ken Sena with Evercore.

Kenneth Sena - Evercore Partners Inc., Research Division

So just a question on pricing. You mentioned overall ad pricing was up, and I assume that, that has to do with the mix towards video. But can you maybe provide or be a little more granular as far as pricing trends across premium and non-premium display and maybe video? And also, you mentioned that international is a big focus, kind of second on the priority list. Maybe you can just provide some -- a few examples of recent traction or efforts there.

Timothy M. Armstrong

Sure. So the -- pricing basically overall, I'll turn it over to Karen, but if you go down our pricing by category, by product, pricing is, we said, double digits. There are cases where it's strong double digits overall. So I think it comes down to the formats and the yield on pricing. But I -- Karen, I feel like pricing is something that we feel good about overall.

Karen E. Dykstra

I think -- yes, I think it's up double digits O&O and the network. So it's up across-the-board. We feel with -- between video, clearly being multiples, traditional display and our growth in video and our position there, I think it's going to continue. Our premium formats are in places where standard banner ads were. And so we see the pricing holding up. But it is consistently up across-the-board double digits.

Timothy M. Armstrong

And then on international, basically I think the way we kind of think about international are on a -- the most important market segments. So if you look at basically 4% of the population is in the United States, majority of our business is in the United States. Theoretically, with our platforms, we should be able to experience strong international growth, and I think that's what's we're seeing, is in the platform business, if it works in one country, it works in every country. And if you take a step back of our focus areas for international, it's been in 2 main areas right now. One is expanding the advertising platforms globally. And again, I would also point out that holding companies are expanding their programmatic areas globally and clients are as well. So everyone is moving in the same direction. And then on the content brand side, it's for us to put the most important content brands in the most important countries. So take HuffPost as an example. Right now, they're covering about 2/3 of the world's GDP in terms of the countries that they're in overall. So the easiest way to think about this is scale things that work in one country that could work in all countries, and then be very specific and targeted about what the lineup of countries are we go to. We have a country map we use here, which is stack-ranked by multiple factors that we're using to roll things out, and we just consolidated our international operations at the beginning of the year to a much tighter, more targeted team, and that team is doing a very good job focusing in on the areas, which mainly right now are Europe and Asia with expansions happening into some degree down in Latin America as well. But the best way to think about it right now is U.S., Europe and Asia.

Operator

Your next question comes from the line of James Lee with CLSA.

James Lee - CLSA Limited, Research Division

Two questions here, please. Tim, can we talk about universal ID here? We haven't talked about this for a while. And clearly, industry is moving towards identity-based platform to have scale and connectivity, and it's kind of even pointed to cross-device marketing and also CRM matching. And help us understand where the road map is. And also for Karen, can you help us understand how much of traffic is coming from -- for HuffPost, is coming from social media? And my thinking is as social media platforms start to reduce their organic reach, how does that impact your economic of customer acquisitions?

Timothy M. Armstrong

Sure. So on the ID issue, there -- our quick strategy is we have a universal ID and login. We have hundreds of millions of people that we have information on in terms of identity overall. So we're in a position where we're one of the main people in, I would say, mass-scale identity understanding on the Web. We have recently worked very, very diligently on our own identity program and team overall, and that's a consolidated across the entire company focus. And then I would say at a larger level, if you look at what's happening in the identity space, there's different cuts of it. That's what's happening in social. There's what's happening in commerce. There's what's happening in content. And each of those has different curves behind it, meaning where people are logging in and how they're logging in. And I think over a period of time, kind of what you're pointing out, which I think is something that will be true over a long period of time, is that you will have basically 3 to 7 kind of identity areas that you identify in as a consumer on the front end, and then there'll be 20 companies on the back end that basically use the identity information to help target, market, subscribers, those type of things. So I think our positioning in the marketplace is certainly in the top quartile and the top 10% of the people on the identity side, overall, and we're very focused on improving our identity areas. And then the second piece is on the CRM matching. We have a very sophisticated approach to that. We're working with our partners on that, and there's a lot of opportunity for us to continue to partner and work with people on that, all under the absolute shield of making sure everybody's privacy protected overall. So -- and then I think at a macro trend on mobile and the Web also, you don't have to look very deeply onto a page to see how many people are trying to get you to log in with their different systems overall, and I'd expect a rationalization of the -- of all the small icons. It's unlikely you're going to have 100 icons on a page to be able to share login, those things. So I think you'll end up with 3 to 5 to 7 strong identity players, and there are a lot of people using that identity to enhance business data and analytics on the back end. So we understand the space, we're focused on it and we have a very good team working on it.

Karen E. Dykstra

Yes. And I think the second part of the question was about Huffington Post. And really, Huffington Post is growing strongly, particularly on mobile, which is a huge opportunity for us. As you know, Huffington Post is highly social. Native ads revenue, just as an example, is up tremendously, triple digits on Huffington Post. Huffington Post is the #1 shared content on Facebook, and somewhere around 40% of viral traffic is from social. So I think it's safe to say that it's a huge opportunity for us, and native ads is a huge focus for us going forward.

James Lee - CLSA Limited, Research Division

And Karen, just to follow up, my last part of the question is -- my question is about social media platform reducing their organic reach and how will that impact your economics of user acquisition there.

Timothy M. Armstrong

Yes. So this is Tim. One of the things that I've said before is we love the social networks, and we love the fact that people are getting into these very similar looking -- if you look at every social platform, everyone has got a media strategy now about taking content. And as a content owner and an advertising platform, we believe there's going to be big opportunities for us and there currently are also for us to both distribute and monetize, not just on our own properties but also throughout the ecosystem on the Web. And I think that's actually an important aspect for our barbell strategy in the future. So as you see more of the social platforms launch more media platforms themselves, we're happy to be somebody who took a universal joint strategy, kind of an Art of War, where we thought the world is going and the world is going where we thought it was going. So we're pleased both with The Huffington Post's organic growth from social traffic directed to HuffPost but also pleased with the fact that we've able to augment our content and usage to sit both on our platforms and other people's platforms.

Operator

Your next question comes from the line of Tom White with Macquarie.

Thomas Cauthorn White - Macquarie Research

Just a high-level question on kind of the broader ADTECH ecosystem. We continue to see consolidation in deals in that sector. I guess when you guys think about kind of the direction the industry is going, are there areas where maybe you believe you'll need to invest over time in order to make sure you remain kind one of those 5 to 10 kind of key sockets you talked about, Tim? Or are you largely content with the offerings you have today? And just quickly, search revenues, growth reversed after a couple of quarters of contraction. Maybe just a little bit more color on exactly what's driving that in terms of partner initiatives.

Timothy M. Armstrong

Yes. So I guess the easiest way to think about this -- and this is our company's take on it and not the industry take, but as best we can tell there's roughly 200 ADTECH companies in the marketplace. It feels like there's going to be chairs for 20 to 30 over time as people consolidate and build their kind of socket plug-ins. So I think kind of what you're seeing in the marketplace today and the start of consolidation is something that's probably going to be a wave of consolidation. And I think at a more macro level, there's going to be a wave of consolidations happening in media and ADTECH overall. But specifically for ADTECH, there's just a certain amount of chairs and a certain amount of things that people can use, and that marketplace will consolidate over time, we believe. The second piece is in our tech stack, we have been very, very specific about this, very aggressive and very proactive about where we thought the market was going, both in terms of video, programmatic, mobile, those things that are on the ADTECH Stack. We will probably add more components to it. At this point, I'd say we are in a very strong position from the assets we currently have today overall. So I think if you look back 3 years ago when we were very small in this space, we had major components to plug into this space. Today, we have targeted areas that we know we'd like to continue to innovate and invest in. But I would say at a macro level, we're probably only 1 of 2 players that's got a real complete stack at this point. So I think operationalizing ONE by AOL and some of those things are what we're really working on and focused on and something spending a lot of time with Bob Lord on and some of the teams in that space. So it's very, I would say, very positive from setting the table. And on a go-forward basis, we're trying to put food on the table.

Karen E. Dykstra

And just to finish off the second part of the question on search, yes, we're pleased with the rebound of search this quarter. I mean, it is a combination of improvements in our core business and our plans to engage more consumers, to improve the consumer experience. I think it's a reflection of the work we've done on improving our product and the combination of that with our search marketing efforts, which we're very pleased with as well. So the 2 -- the combination of those helped to improve the results bounce back a bit in the second quarter.

Timothy M. Armstrong

And just to wrap up, overall I think one is that the thing you don't see in these results is I think that the culture and talent level at AOL has dramatically changed over the last 4 years. We are leaner, nimbler, faster and have very, very talented people across multiple areas and multiple depths within the organization. The second piece is there's things in our Q2 results that should really point out, I think, some of the things that we did a few years ago, the breadcrumbs we kind of put out there about video and programmatic and those things. And if you look at our results versus the industry trends, it's easy to think of AOL as a company that has been around for a little while. But I think if you look at our results, what you see today is the new AOL and a company that was years ago incredibly forward-looking and one of the most forward-looking industries -- people in our industry. And we have both in the content business and the programmatic ADTECH Stack business built something that I think is not replicable at this point and something that we're really going to put the hammer down on. And the last thing I would just end with overall are 2 quick things. One is, we have a drive internally to be the best operating company in our space, and we're really focused on that and it's something we're spending as much time on. So as much as you see the public-facing stuff we're doing to improve the company, we're really interested in improving the background of the company. And the final thing I'd say, just on a personal note for the employees that are listening to the call, there's -- I want to give a shout-out to Patty [ph], who is somebody in our -- one of our assistants that's in New York who just got down with her last cancer treatment. And we call her the sheriff around the office and the sheriff is back in town, and we're having a party for her later today. So I hope everybody in New York will join Patty's [ph] party today at 5:30. It's great to have her back. And we'll see you guys on the next earnings call. Thanks for joining us.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.

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Source: AOL's (AOL) CEO Timothy Armstrong on Q2 2014 Results - Earnings Call Transcript

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