AOL Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: AOL Inc. (AOL)


Q3 2012 Earnings Call

November 06, 2012 8:00 am ET


Eoin Ryan

Timothy M. Armstrong - Chairman and Chief Executive Officer

Karen E. Dykstra - Chief Financial Officer, Director, Chairman of Audit Committee, Chairman of Finance Committee and Member of Executive Committee

Arthur Minson - Chief Operating Officer and Executive Vice President


Brian J. Pitz - Jefferies & Company, Inc., Research Division

Ross Sandler - Deutsche Bank AG, Research Division

Kenneth Sena - Evercore Partners Inc., Research Division

Neil A. Doshi - Citigroup Inc, Research Division

Laura A. Martin - Needham & Company, LLC, Research Division

Benjamin A. Schachter - Macquarie Research

James Cakmak

Stephen Ju - Crédit Suisse AG, Research Division

Ryan Ripp - Barclays Capital, Research Division


Good day, ladies and gentlemen, and welcome to AOL's Third Quarter 2012 Earnings Conference Call. My name is Tarita, 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 hand over the conference over to Mr. Eoin Ryan, Senior Vice President of Investor Relations. Please proceed.

Eoin Ryan

Good morning. Thanks, operator, and everyone, for joining us for our third quarter 2012 earnings call. You can find our Q3 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 CFO, Karen Dykstra; and our COO, Artie Minson.

We will make some brief remarks on the quarter and on our overall strategy, and then we will open the lines 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 our 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, 2011, filed with the SEC. All information discussed in this conference call is as of today, November 6, 2012, 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 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 and on our official corporate blog at

And with that, I'll turn it over to Tim.

Timothy M. Armstrong

Thanks, Eoin. Good morning, everybody. Thanks for joining the call. With me are Karen and Artie. And most importantly, to kick the call off, I wanted to formally welcome Karen into the AOL family as our new CFO and new partner at AOL. She has been an invaluable board member for the past 3 years, and we're honored to have her join us full time. Karen is a very talented executive, but most of all, she's a great team player, and our entire management team and board look forward to continuing to work with her. So Karen, formally?

Karen E. Dykstra

Thank you, Tim. It's great to be here this morning.

Timothy M. Armstrong

So overall, it's great to be here this morning also because we are pleased with our results and wanted to highlight 3 simple themes for investors as you look through our results.

Number one is AOL is continuing our trend of strategic operational and financial improvements and is setting up for sustained top line and bottom line growth. Number two, we have delivered concrete shareholder value. By the close of 2012, we are planning to have reduced our outstanding shares by roughly 30%. As an investor, you will own a significantly larger percentage of a vastly improved company. Additionally, shareholders will be receiving $5.15 per share from a cash dividend before the end of the year. The next and third -- the next phase of the company will be about growth, and we are looking forward to being able to take advantage of the investments we have made in premium content, advertising and AOL core services. We are single-minded on returning to growth and the company's organized and motivated to get there.

Before we jump into results, though, I wanted to share with you some updates on our work around Sandy. I don't think there was a company in the world that covered Sandy more extensively and comprehensively than we did at AOL. AOL and our brands have been at the epicenter of Sandy because we have brands that live at the center of communities and the center of information for the economy. Our teams have worked 24/7 to connect our platforms to tens of millions of people. We had 329 Patch sites that have been affected by Sandy. There have been over 14,000 Sandy-related articles and blog posts written on Patch. Last Tuesday was the highest traffic day in the history of Patch, nearly twice as high as the previous best. Tuesday also had the highest number of search entries in the history of Patch. We are seeing twice as much social traffic as a typical October day and over 3x as much mobile usage.

Over the past 2 days, traffic at Sandy sites has quadrupled versus normal levels, and we've seen a 700% week-over-week increase in Patch iPhone app downloads. Our users have also uploaded between 7,000 and 10,000 related photos and videos to the Patch platform. Huffington Post has also been doing a tremendous job covering Sandy, and we've had roughly 10 million unique visitors to our Sandy coverage and hundreds of millions of page views. The combination of Patch locally and HuffPost regionally and nationally has been powerful for getting people information they need.

But there's a more important story behind Sandy that was not on our platforms, but was from our AOL team. On Saturday morning this past weekend, a group of AOLers decided to directly help members of our Patch communities. In less than 48 hours, hundreds of AOLers in Dulles, Baltimore, D.C. and around the country organized a physical procurement of goods based on the needs we aggregated directly from the most devastated Patch towns. I wanted to give a special shoutout to Jon Brod, who's been leading the effort at AOL. By Sunday afternoon, we had multiple 18-wheelers that were packed Sunday and overnight into Monday and rolled out on Monday to those Patch towns, and they will be delivering thousands of boxes to families with supplies they need the most.

The leadership at AOL and from across functional teamwork is at an all-time high, and I think the work done by AOLers this past weekend and over the last 8 to 10 days is an example of that, and it's something that we're all very excited about as a management team.

Back to the business results. At the beginning of the year, we made the following commitments to our shareholders: Number one is to grow adjusted OIBDA in 2013. We grew OIBDA year-over-year in Q2 and Q3 this year, and we remain on track to fulfill our promise for the full year 2013 of growth in both top line and bottom line.

Number two, we wanted to return 100% of the patent transaction proceeds to shareholders. We have clearly articulated our plan for that. And as I mentioned, by year end, we will have reduced our outstanding shares by over 18 million shares, and we will have paid out approximately $500 million in a special dividend to our shareholders.

Number three, bring Patch to run rate profitability in the fourth quarter of 2013. We are growing revenue rapidly at Patch on a reduced expense base, and we remain on track to reach our goal and hopefully go beyond that goal.

Number four, add 2 new highly qualified directors in the next 12 months. We just added Hugh Johnston from Pepsi and Dawn Lepore from Prosper Marketplace drugstore and Charles Schwab to the board, which are big wins for the company, and they attended our first board meeting last week.

Number five, organize and report by operating segments by the end of 2012. Q4 will be the first quarter we report in segments, and Artie will cover that upcoming in the call.

Zooming into Q3. We are pleased with our results, and we made progress against our intended targets that I mentioned on the last call. And these are the targets that a mentioned: On audience growth, AOL's total audience grew by 4% year-over-year in Q3 and in line with our competitive set. We also have had tremendous mobile growth, and we have 44 million users of our mobile products and services, and we expect that number to continue to grow.

On revenue and expenses. For Q3, we are posting our best relative performance in 7 years. Adjusted OIBDA has grown consecutively for 4 quarters and year-over-year for 2 quarters in a row. Advertising revenue is up 7%, growing strongly across many of our investment areas, including video. Our video revenue was roughly $10 million 2 years ago, and in 2012, we will do about $100 million in video revenue. The core AOL service revenue is strong, led by Search up 8%, and we have much lower churn rates overall in the Access business and adding a lot more value to Access numbers. Adjusted expenses are also down 8% year-over-year.

On building world-class products and platforms around our brands, we relaunched StyleList during the quarter with over 250 curated stylists featuring over 2,000 products for purchase. Our StyleList properties moved up to the #1 position in the style and beauty category. We moved up to #5 in lifestyle overall. AOL On continues to scale, and we are building into a TV network for the new pipe connecting the conversion mediums between desktops, mobile devices and connected TVs. In September, we had 53 million pure content video uniques across our properties, and for the third month running, we were #2 in video views. The number of videos in our library has soared from less than 30,000 2 years ago to over 450,000.

On the monetization of video, we have improved significantly, growing at double-digit rates both year-over-year and quarter-over-quarter. Our video revenue, we expect in 2013, to continue to scale very nicely.

HuffPost also has gotten very deeply into video. HuffPost Live serves 12 hours of streaming content that is sponsored. And we're able to take that 12 hours of video production and content and syndicate it across the web and allow it to be monetized on our properties and other properties.

In Q3, we continued to work on a rapid pace, releasing, improving new -- many new mobile and tablet versions of our products, including AOL On, TechCrunch, MovieFone, MapQuest, Winamp, SHOUTcast, AOL Autos and autoblog.

The fourth area is creating technological advantages inside our key strategy areas. We hosted a live blogging event for the iPhone 5 launch on September 12 on our best-in-class blogging technology from Blogsmith, and we had some outstanding results. In 2 hours, we peaked at 800,000 concurrent users and 1.6 million unique visitors. We have used the same technology for live blogging the presidential debates and, I hope you caught some of that across the AOL Properties.

We are now operating best-in-class in efficient global platforms with our 2 primary data centers in Virginia receiving ENERGY STAR certification by the EPA. They are only 2 of 26 data centers like it in the country. Our Search engineers have completed the unified global search platform that allows us to globally test, update and improve our Search platform in partnership with Google. Our ops, infrastructure, data center, network systems, tools and storage teams, I want to also give a special callout for how they handled Sandy, and I think our expertise in that area allowed us to keep our services up 24/7. We had one glitch with the Huffington Post, but it was not on our data center, but we're migrating it currently to our data center.

And then the final one is being the most attractive company for talent. As I mentioned, we have our 2 new highly qualified and deeply experienced Board of Director members. We've also hired over 700 AOLers in the past 12 months, and we are continuing to keep the cost structure down while we do that. We have a very rigorous hiring approach and a thorough hiring process, and the 700 people we hired are going to continue to raise the bar for talent at the entire company. In Q3, we added roughly 40 engineers to our CTO Curtis Brown's organization, including a new CIO, Michael Freker.

One area I wanted to give more focus on during the call is the Advertising business because it is an area of strategic importance, and our results in Advertising will improve over time. But it is worth a quick deep dive into our strategy to understand the results.

Now I'm going to take a minute to talk about what's happening in the overall marketplace and then talk about AOL's results. The ad marketplace is essentially split into 2 high-level components. In the first bucket, there's programmatic advertising. In the second bucket, there's marketing services. Our strategy and our resources have aggressively gone into both areas. Our total spend from the Advertising Age 100 is up year-over-year. And the top 6 agency holding companies are up year-over-year based on our combined strategy of programmatic advertising, as well as deep marketing services. On the programmatic side, we have rejuvenated and we have added assets in video, mobile, ad serving, real-time bidding and formats to a single technology stack. In basic English, we see automated trading coming, and we have built one of the biggest and best targeting and trading systems in the marketplace. And we will continue to invest in the people and technology to capture the programmatic side of advertising.

On the marketing services side of the business, we have rejuvenated the AOL brand properties and invested in new brand properties that are attractive to marketing partners and big brands. We believe we have now set an attractive asset set, both on the programmatic side and the marketing services side. We have one sales force that sells both product lines with specialty sales behind it. We also have one advertising product organization that is now building products for partners across the programmatic and AOL-owned and operated side, and we have significant investments going into formats and targeting that are attractive to our customers.

Our domestic display results are not as robust as we would like, and we are going to improve them over time, based on the following: number one is improved traffic across AOL's brand portfolio and improved brand experience; two is the relaunch of endemic brands within AOL Media and the formation of lifestyle brands on the Huffington Post; three is fewer, more powerful ad products and formats that are available across our brand properties, and we are currently seeing more domestic display flow through our network, but simultaneously seeing strong growth and sold impressions in pricing by both premium formats and videos and we expect to rapidly become a more powerful and meaningful portion of our overall display revenue.

The continued operational improvements we are putting in place inside the sales force will also be meaningful in the bottom line as we have a deep and long strategy in advertising, and many of our competitors have let their advertising stack die or be replaced. Although the results don't show the depth of the strategy we have, it is in place and we are spending a lot of time on it. Advertising remains a very big opportunity, and we have strong assets in this marketplace.

And finally, I would say from the overall marketplace and having spent the last 8 weeks out with many customers for 2013, planning and buying, we expect the programmatic side of the marketplace to grow dramatically in 2013. We also expect the marketing services side of the business to remain strong. On average, we see about globally 7% of advertising getting spent programmatically. The rest is in marketing services. That number will shift up to double-digit percentages next year, and we feel like we're in a great position to capture that. And two is on the marketing services side. We are in deep conversations with many of the Ad Age partner 100 companies to do deep marketing services for 2013, and I would expect that to grow.

In summary, as the largest individual shareholder, as CEO and Chairman of the Board, I'm pleased with our results and efforts. I know we can do a better job on multiple fronts, and we are working very hard to get there. There are 7 items on my personal list to get organized for January 1, and I promise we'll get them done.

Someone I know has been working very hard is Karen Dykstra, and let me turn the call over to Karen.

Karen E. Dykstra

Thanks, Tim, and thanks to everybody for joining us this morning. I'm very happy to join the team and glad to be with you all on this call, and I look forward to your questions this morning and meeting you in the future.

I'm also happy to report on AOL's progress this morning. My remarks will be brief and leave more time for your questions, but I want to highlight a number of things that are important for you to consider when analyzing our results and thinking about AOL's future.

Starting off with advertising revenue, which grew 7% year-over-year and was driven by growth in Third Party Network and Search revenue. Search grew for the first time in over 3 years and is a very different result compared to the 15% decline in 2011 and 31% decline in 2010.

Our Third Party Network revenue grew 18% year-over-year in the third quarter, about 1/2 of it coming organically and 1/2 coming from our Japan joint venture, which we began consolidating in our results after increasing our ownership position in the first quarter of 2012. And note also that we are seeing strong growth from on O&O impression. The growth here is being driven by our ability to increase the number of publishers joining the network and the number of premium products, packages and formats available to them.

Our Third Party revenue line has now grown year-over-year for 6 consecutive quarters and has grown sequentially for 9 consecutive quarters, which is really outstanding. This is a strong growing area for us, and as Tim mentioned, we're investing in technology and engineers to maintain and grow our scale and leadership position, and you'll see some of these investments beginning in Q4.

Our Search revenues grew year-over-year for the first time in over 3 years, which was driven by growth in This offset some of the declining Search revenue from the AOL Client, from international market and legacy distribution deals. Growth on is primarily coming from product improvement and yield optimization, ensuring that customers receive more relevant sponsored listings for more commercial-oriented queries.

Additionally, during the quarter, we tested a marketing program which helped drive usage on AOL products and increase queries to Search revenue on now represents 46% of our overall Search revenue, and we're incredibly pleased with the team's execution getting us to this point.

Turning to global display revenue, which declined 1% year-over-year this quarter. Growth came from international display, particularly in Canada and the U.K., and was offset by domestic decline. And Tim has already spoken about this, but I will repeat that overall impressions sold grew during the quarter and thanks a lot in part to And importantly, prices remained strong and actually grew on reserved inventory, which was driven largely by the video and premium formats, and on growth areas which Tim also mentioned.

I'll end the revenue discussion with our subscription revenue, which declined 10%, representing the lowest rate of year-over-year decline in over 6 years. Subscriber declines and churn ticked up very slightly from Q2, mostly due to the subscriber program from 2011 that Artie and Tim have talked about with you on previous calls and which we described more fully in the release.

Now that we've reached the anniversary of that impact on the metrics and the rate of subscriber decline ticked up slightly, but what's more important is that the underlying trends remain very positive and drove the improvement in revenue we reported today. And Artie's going to talk about that more in a little bit.

But sticking with subscription. We've redefined our access offering as a membership business that brings valuable bundle of products and services that customers want and use, compared to previous offerings which were more about getting online. Actually, only about 10% of our subscribers use our service now just to get online. As part of the process, we've identified a demand for an online service, curating subscription bundles for different verticals and horizontals, and you'll hear more about this in the future.

AOL has a long and deep experience running subscription services, and given the success we've had in stabilizing our legacy subscription operation, we're now working hard to deliver new subscription business for our new membership services in 2013.

Turning to expenses. And as the case with the revenue, our expense trend is also one of improvement with this quarter marking the fifth consecutive quarter of reduction in adjusted OIBDA expenses. Excluding TAC and onetimes, these expenses also declined, as Tim said, 8% from Q3 2011.

I'm really just getting started here in my role as CFO, so less than 60 days on the job. But even though I'm new here, I know I share the same philosophy as Artie when it comes to expenses and investment. Despite our success lowering expenses for the past 5 quarters, we're still vigilant on expense control, and this is going to continue. At the same time, we're increasing our investment in new products and positioning us for growth. We continue to watch our investments closely, ready to pull back or push forward as warranted. As a result of the expense management and revenue improvement, we grew adjusted OIBDA again year-over-year and quarter-over-quarter in Q3, excluding, of course, the onetimes -- the large onetimes we talked about in Q2.

We had originally guided you to our expectation for full year adjusted OIBDA, excluding onetimes, to $375 million. And giving our -- given our outperformance in Q3, we are now comfortable with a number closer to $400 million, which reflects both the upside from Q3 and our anticipated investment in growth initiatives in Q4. It remains our expectation to return AOL to adjusted OIBDA growth for the year in 2013, and again, of course, that excludes the 2012 onetimes that I just spoke about.

Next, I want to turn quickly to an update on the ASR. As we noted in the press release, we have already repurchased or we've already received 10.5 million shares from Barclays, and we expect to receive an additional 8 million shares by the end of the year, which brings our shares outstanding down roughly from about 85 million shares today to roughly 77 million shares by the end of December. And so by that time, we'll have reduced our shares outstanding by roughly 30% since 2010, which we think is a great result for the company and for our shareholders, particularly as we enter 2013, which we've said is going to be a growth year.

Turning to the balance sheet. It remains exceptionally strong. We ended the quarter with $867 million in cash. Free cash flow grew 27% year-over-year to $71.5 million, so we continue to efficiently convert adjusted OIBDA to free cash flow, generating significant amounts of cash.

Now there are a number of moving parts in the balance sheet as a result of the ASR and special dividend, and I want to make sure you have your arms around the moving parts because these are some big numbers and swings on the balance sheet.

First, we paid Barclays $654 million in cash, representing $600 million for the shares for the buyback and $54 million for the present value of the special dividend for the shares we received prior to the ex-dividend date. Second, Barclays has, to date, delivered 10.5 million shares to AOL. Third, AOL will be paying a onetime special cash dividend of $5.15 per share on December 14. The cash payment here will be roughly $445 million, not the $500 million, as we've already paid the $54 million to Barclays, as I've said.

The accounting for all this is as follows: first, the payment we made to Barclays and the stock we recorded a $654 million decrease in cash, $132 million increase in our Treasury stock, and the remainder is currently reflected as a reduction to additional paid-in capital. And as we receive more shares from Barclays, the amounts will -- that are currently reflected as a reduction to additional paid-in capital will obviously be reclassed to Treasury stock.

Next, we have recorded a liability of $445 million, with an offsetting reduction to retained earnings to reflect our current estimate of the dividend to be paid in cash to shareholders of record as of December 5 and paid on December 14.

So a lot of movement on the balance sheet. And with that, I will conclude and repeat that I am very happy to join AOL and join the operating team at a time when we're making meaningful progress, and I'm very pleased with how we've positioned ourselves financially and operationally for success in the coming year.

And with that, I'll turn it over to Artie.

Arthur Minson

Thanks, Karen, and welcome. This morning, I would like to take a moment to talk about how we've organized the company operationally and give you a preview of our planned segments, how they are aligned with our strategy and focus areas, and then some of our recent operational wins.

Less than 3 years ago, AOL emerged as a public company after spending 8 years within Time Warner. At the time of the spin, we decided to manage AOL's multiple brands and businesses as one unit with all operational and investment decisions made centrally. The sheer enormity of the task at hand in restructuring AOL to align with our new strategy required that, until now, we operate the company that way while we methodically untangled the company's operations and thought strategically about capital allocation, capital structure, overall expense reductions and tax planning. The work of the past almost 3 years has brought a greater degree of clarity to the operations of AOL. And as a result, we are now at another inflection point where we expect to shortly begin operating the company in segments.

We currently expect there to be 3 principal reportable segments as follows: first, the AOL Membership Group, which will include our subscription services, AIM and AOL Mail, given the membership and registration nature of these services. Bud Rosenthal, who has done such a great job rethinking our value proposition around our subscription service, will continue to report to me running our subscription operations. And Francis Lobo, who has overseen the comeback of our Search operations, added oversight of AIM and AOL Mail in addition to other responsibilities I will outline in a minute.

Second, the Content Brands Group, which will include all of our branded content properties, including The Huffington Post; our AOL lifestyle properties, including property such as StyleList, KitchenDaily, MAKERS and Homesessive;; Patch; our business tech, entertainment and marketplace properties, which include well-known brands such as MovieFone, AOL Music, TechCrunch, Engadget, AOL Autos, autoblog and DailyFinance, to name a few.

Finally, our content brands will include and MapQuest, which will be folded into Francis Lobo's new broader responsibilities. Francis will also continue to oversee our Search efforts, and our Search revenues will be allocated between membership and content brands depending on how the queries and searches were originated.

The other principal segment will be the Group, led by Ned Brody, which is our B2B business, including, goviral, 5min, StudioNow and ADTECH. Ned and team have done an amazing job turning this business around, and as Tim mentioned, we see this area providing meaningful growth opportunities in our future.

Each business lead and team within each area is tasked with building premium products and experience for our users and partners and driving hard on each of the focus areas Tim outlined. Each quarter, we will, of course, update you in depth on the progress of each segment. But before I close, I will give you just a few highlights from some of the recent wins we have seen.

In the Membership space, clearly, we continue to make progress in the subscription services area, managing churn and driving new product adoption, which led to the lowest revenue decline in over 6 years. As Karen mentioned, we believe there are opportunities here for us to offer new curated subscription products, and you should expect to hear more from us here in 2013.

We have also continued to innovate Mail. And the recent launch of Alto mail has gotten great feedback.

In the Content Brand space, we are focusing our efforts on places we see the best returns at the intersection of consumer and advertiser demand, while pruning our product portfolio in areas we don't believe have the same characteristics. We relaunched StyleList, KitchenDaily and recently to significantly better and more relevant product experiences, which I encourage you to check out. Early feedback from both consumers and advertisers on these relaunches has been very positive, and we were able to accomplish these relaunches in a very cost-effective manner. We expect investments such as these will provide attractive financial returns for our investors. But to be clear, there are no sacred cows, and we will adjust accordingly in areas that are off plan.

On Patch, we have rebuilt the platform and launched a new product in alpha in 5 towns. We are growing revenue strongly and doing it on an expense base roughly 30% lower than last year's expense base for Patch. We have reduced our expense base by combining certain towns where it made sense to do so and by more efficiently structuring the Patch operations. We remain committed to run rate profitability by Q4 2013.

In the Group, we continue to make significant progress. We are growing consistently each quarter and increasing the number of publishers on the network. We are investing to ensure that progress continues and accelerates. Over the past 6 months, we rolled out AdLearn open platform providing our partners with access to the robust AdLearn optimization technology, real-time bidding capabilities, massive reach, premium inventory, and importantly, allowing clients to manage, optimize and analyze online marketing campaigns from one central platform. has held a leadership position in the nonreserved inventory marketplace for more than a decade, and with the launch of AOP, we are becoming well positioned to become a strong player in the programmatic buying space. And there are more products coming that will complete our end-to-end offering from advertiser to publisher, all operating on one tech stack.

So we are very excited about the progress we have made and the operational cadence we are beginning to build. We are now operating more seamlessly with clear goals and objectives for each of the businesses, specifically tailored to the business environment in which they operate, which I think sets us up very well for 2013 and beyond.

With that, I will turn it over to the operator to take your questions. Operator?

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Mr. Brian Pitz from Jefferies.

Brian J. Pitz - Jefferies & Company, Inc., Research Division

Tim, you have very strong momentum on many key properties from recent events such as the election, on Huffington Post and more recently very positive trends on Patch due to events as you described. Could you give us a sense how you maintain momentum on these and other properties and leverage these events to drive even higher growth into 2013? Also, any sense on what percent of ad revenue was from political in the quarter? Finally, any comments on whether the weaker domestic display trends continued into early Q4?

Timothy M. Armstrong

Sure. Thanks, Brian. So let me just -- I'll knock those out quickly. HuffPost, I talked to Arianna over the weekend, and one of the things we talked about was how is the momentum going to continue after the election. There's 2 ways to do it [indiscernible] to be tie. If there's an election tie, which will be [indiscernible] tie at this point. That would be beneficial. I'm kidding, but if there is a tie, it will be beneficial. And then the other area is basically one of the things that we've really noticed within our editorial coverage -- I mean, I'll -- specific around Huffington Post is that -- and Arianna did -- she has a nice article today about it, is people really want to know what the commitments that have been made from politicians and government. So one of the things, I think, Arianna and her team are working on are what were all the commitments made during the election and tracking those afterwards, and I think there's a very deep strategy around how you continue the momentum there and I think that's very thoughtful strategy. On Patch and Huffington Post, and Patch's obviously, as traffic has exploded with Sandy, the most important thing for us is, which is across all our products, to get people to the properties because every time we're able to get people to the property, a certain percentage then become return users and brand -- loyal brand users. And I think that's what we see most beneficial out of these things like Sandy or the election cycle. And then when you go deeper into our other properties across the board, in our auto space for instance, one of the things we're doing momentum-wise is that we've changed the way that you can search for autos, which used to be by price or SUV or sedan, into what kind of a human being you are, how big your family is, those type of things. And we're starting to really augment a lot of our properties around how human behavior happens as well. I think you see the same thing that Maureen Sullivan's been doing across our lifestyle brand. That kind of list concept is kind of an always-on concept around content. So I think you see kind of across-the-board us figuring out very cleanly how to build momentum over time. On the ad revenue front for the political environment, for us versus the last election, we had significantly -- we got millions and millions of dollars for it overall. And I think one of the things that was really interesting, because it played right into our video strategy, is we were able to get between $5 million and $10 million alone just on the video syndicated property we have around AOL On and a much larger chunk around the rest of the properties that we have across AOL. So I think the political spending was very strong this year. And I think on the next election cycle, the midterm elections, we'll do an even better job because we learned a lot of things. On the domestic display front, let me split it into 2 categories. The first category is Q4 where we see basically continuing momentum in terms of our overall strategy in the marketplace. So you see with strong momentum. And on the domestic side, I think we basically see a continuation of what we saw in Q3. But I think the more important thing is we've been spending a lot of time on 2013. And as of right now, 2013 domestic display-wise, we're currently pacing at a stronger pace than we were last year at this time. So I think there was a lot of effect of us changing the brands. We also had -- we weren't exactly 100% drilled and focused on the advertising strategy in the first half of the year, but we are now. And I think overall what you're going to see is an operational improvement around advertising as we get into 2013. I would say at a summary level, though, that external ad market, and I've both been in Europe and the U.S. in the last couple of weeks to see a lot of people, there is very strong momentum in the TV marketplace and with TV money online and there's very strong both in the programmatic and deep marketing services side. So we're very quickly organizing around those things, and you see the momentum we have in video and mobile growing quickly. So I think we're very organized and doing fewer things than we were doing a year ago in that space.


Next question comes from Ross Sandler, Deutsche Bank.

Ross Sandler - Deutsche Bank AG, Research Division

It's Ross Sandler. So I have 2 quick questions, one on Search, and then, Karen, one on the guidance. Tim, can you provide a little bit more color about what exactly is driving the Search growth at between Search and volume -- sorry, price and volume? With page views up 4%, seems like it could be coming more on the price side versus the volume side. So can you just talk about those trend? And then, Karen, your OIBDA guidance for 4Q assumes kind of a midteen sequential increase versus 3Q. Last year, I think, it was closer to 40%. So is there any big investments planned in 4Q? Or is that just conservatism?

Timothy M. Armstrong

So let me kick the Search question to Artie because he's been spending a lot of time on it.

Arthur Minson

Ross, look, what I might do is maybe I'll talk about the subscription and the Search performance together because I think what you'll see there is we have very similar strategies in those areas and it all starts with really making sure we're constantly improving the products because if you have great products, you set yourself up for what we view as sustainable performance. On the sub side, as we've talked about, we've gotten the product meaningfully better. And as a result, you see significant product adoption in the new value-added services we provide. This leads to higher ARPU and reduced churn, and as a result, you get the lowest revenue decline in several years. Similarly, on the Search side, we've worked with Google, who's our partner, to significantly improve the product, and this has led to improved metrics across the board, better coverage, better clickthrough rates and improved RPMs. And having a better Search product, it also gave us the confidence this quarter to invest marketing dollars in this area, and that -- frankly, that drove a few points of our Search growth. We're also very focused on improving the overall experience for our users. And as Karen said, that now represents close to 1/2 the Search revenue. And what we've seen there is, as a result of the improved performance on dot-com, that Search queries actually grew there sequentially, which we're really pleased with. So it's coming from, obviously, at this point on the rate side, but we're also pleased with the very recent sequential trends on the volume side on Search. And I'll turn it to Karen for just the OIBDA guidance question.

Karen E. Dykstra

Yes, well, we have done better than expectations this quarter, clearly. And for our guidance now, we're comfortable with the $400 million. But remember, we've talked about increased investments in the fourth quarter, and we are trying to position ourselves for entering 2013 as a growth year. So we are kicking up some of those expenses starting in the fourth quarter. Particularly, we've talked about some in and some marketing campaigns. And although we have some upside, I believe, in the expense levels. So at this point, we're comfortable with the $400 million.


Next question comes from Ken Sena, Evercore Partners.

Kenneth Sena - Evercore Partners Inc., Research Division

I just had a question on the 4Q resegmentation. And I was wondering if you could provide a little more detail maybe on what year-on-year growth rates we can expect within the display and third-party vectors there, and if you'll provide pro forma historicals.

Timothy M. Armstrong

Yes, I think we're going to be careful about setting future expectations around those. But Artie, do you want to talk about...

Karen E. Dykstra

Yes. I was going to say, and we will, yes, provide pro forma comparison.


Next question comes from Neil Doshi, Citigroup.

Neil A. Doshi - Citigroup Inc, Research Division

Tim, you mentioned that you met with a number of advertising partners as they are planning for 2013. Any thoughts as to what they're most interested in, the concerns they have and which of your products and services are resonating most with them right now?

Timothy M. Armstrong

Sure. So basically, companies pretty much have what I would call a barbell strategy, which is on one side of the barbell they have the need-to-do things at higher scale, programmatically more targeting. And I think from that standpoint, there are multiple things that are happening in that marketplace. One is people are looking for high-scale solutions. Artie mentioned AOP. That's a product we bring out to ad agencies on our scale programmatic side. And the agency community has big investors right now holding their own technology and partnering with us, and that's a big area of opportunity. All the holding companies are engaged in conversations around that. And then underneath it, actually, I think there's a trend, which I think will continue to happen, which is more formats inside of programmatic, so I think when you look at video, mobile, those things, I'm guessing by the end of next year, the programmatic platforms, which, again, we have one of the biggest, and we're able to do this now, is to take multiple formats into a programmatic setting, target them, measure them, price them all in the same system. So I think that is kind of, overall, is a very large trend for probably years to come. And if I benchmark roughly between our advertising base right now, a few of our largest advertisers are already spending double digits, like 10 -- between 10% and 20% are programmatic. Some are spending less than that, but I think the trend is they're going to spend more. And I would guess over the next few years it's going to settle into double digits between 20%, 30%, 40% over the next 3 years there. On the other side of the barbell is there's a very deep need for people to, essentially on the marketing services side, connect their brands at a high level. The same theory we have as a company, which are brands are becoming more important and content's becoming more important, the brands are saying that as well. And one of the things that's in the marketplace right now for 2013, and you could channel check this out of the marketplace, is social has been a huge driver of spending in display, and I think it will continue to be. But also now people are realizing you have to have content with social, so there's a huge movement towards partnering around content on the marketing services side, which is beneficial. And then that trend also is beneficial for us because we've essentially, with Project Devil and Pictela and premium formats, have built essentially a content management system for brands where they can publish content. So you see things growing very quickly on that side, which is video. You see premium formats, things like Project Devil that allow brands to really tell their brand story overall. So I -- here's, I guess, my thing is I see, this is my personal things from being out into the field, 3 kind of big trends: big trend towards programmatic; big trend towards TV buying, moving; and big trend towards very deep, fewer partners, bigger spending overall. And I think we play well into all 3 of those segments right now.


The next question comes from Laura Martin, Needham & Company.

Laura A. Martin - Needham & Company, LLC, Research Division

Tim, you've had a mobile-first strategy for about a year, and Facebook and Yahoo! have recently caught up with you. One of the things we're seeing with the shift towards mobile by consumers is price pressure on the downside on the RPM side. I heard you said you had 44 million mobile users now. Could you talk about the pricing implications of that and how you think that market develops on the monetization side as money follows consumers, please?

Timothy M. Armstrong

Sure. So let me, and I'll kick it over to Artie afterwards if you want to talk a little bit about where we're going with mobile right now. But we have had a mobile-first strategy, which is essentially to make all of our products and services work on small screens and then move up to big screens and that includes advertising. And on the content side of it, we've launched a number of new properties, and Artie can detail maybe some of those, that are kind of mobile-first initiatives. On the advertising front, we have also built our ad systems to be mobile-first, meaning that you can serve cross-screen and target cross-screen from one input and one system overall, which is really meaningful. On the mobile advertising dynamic side are the different things that we see happening. One is there's very high interaction rates from consumers, so that's a very big net positive, and there can be multi-hundred percentage points improvements and interactions. That will probably come down over time as it normalizes. But very good signals on the consumer side and on the format side there. On the pricing side, the same thing that happened at the beginning of the Internet is happening at the beginning of mobile, which is essentially there's a lot of network-based mobile monetization happening at this point. We're able to get high CPMs and very strong pricing when we sell our owned and operated properties, specifically around mobile, so I think that pricing has actually remained pretty high when it's focused on specific O&O pricing for mobile. But what you see in the bucket of mobile monetization is a much higher level of inventory getting monetized by networks. And again, I could be wrong, but I think from an industry perspective, it's a little bit natural to assume a lot of these other formats and devices have taken off. There tend to be lower CPMs out of the gate. They're more network focused. And over time, you build up kind of a barbell effect on both sides there. So I would expect mobile usage to grow. I would expect mobile advertising to grow, which it is. I'd expect O&O, once people specifically buy it, to have very high CPMs and high monetization. But I think the majority of our inventory for some period going forward is going to be more network-priced, which I think is a natural trend in the industry. And then the only other thing I'd say is we do have a leadership advantage in cross-screen ad serving overall and on the network. And then two is, important -- this is very important, is I think from the standpoint of where we see mobile going in the future, we have a combined content and ad systems strategy. Artie, do you want to mention any of those mobile-first for me [ph]?

Arthur Minson

Sure. Laura, it's Artie. I'll just talk a little bit about how we've organized to date our mobile business and where we're going. As you know, we had run our mobile operations very centralized. And the goal which we had there was to really do extensions of our existing products to mobile, but then also to have a team dedicated to developing mobile-first products. As Tim talked about, what we're really focused on is unifying across multiple screens the mobile experience. So what we're going to begin doing is decentralizing the mobile organization to build resources back into the brands so that they have the ability to have unified experiences across teams. At the same time, what we're going to do is have a dedicated team who will continue to focus on mobile-first products. And you've seen some of those come out from us already, products like Editions and product like Clucks. We think those are very important products for us to focus on and to have in the DNA of the company of mobile-first initiatives, so we'll continue down that path as well

Timothy M. Armstrong

And maybe one more great example is, which has been historical brand that is mobile-first. Very good product, and please check it out.


Next question comes from Ben Schachter from Macquarie.

Benjamin A. Schachter - Macquarie Research

A few questions. First, on Search, can you help us understand exactly what you mean by these marketing programs and how sustainable they are? And then also on Search, are you going to benefit at all from Google's move to Product Listing Ads? And then on video, if you could just help us understand sort of the key drivers here. What are the sites that are really driving video? Is it On, Is it HuffPo? Is it network? And then finally, on the 3 segments, I guess I'm trying to understand if -- are you positioning these things to be spun out or are there key benefits to being under the overall AOL corporate umbrella that will remain crucial? Or can these things be spun out over time?

Timothy M. Armstrong

Artie, you want to take the Search?

Arthur Minson

Hey, Ben, it's Artie. A lot of questions there. I will -- on the Search one, what we have done, similar to Ask [ph], is try to drive marketing where possible. Where we can efficiently, we've begun testing the program to drive additional queries to dot-com. Early days there. We're pleased with the results, and we'll continue to monitor that program's progress. But as I said, we're pleased with the results there. I can talk a little bit about the segments operationally, and if Karen wants to hit it financially. I don't think there's -- really, it's just how we're going to organize ourselves internally, and there's no real plan for any spinouts. There's a lot of interdependencies, frankly, between the segments, and that's something, which the finance team is working through so that we can report the segments accordingly. But it's really just how we're going to focus the teams operationally.

Timothy M. Armstrong

I'll also just say, to put a nail on that one and make sure there's no question marks, is it's more of a spin-in than a spin-out. I think we're basically combining a lot of the assets and resources of groups to have a more leveraged approach to the business.

Karen E. Dykstra

Yes, and let me just hit the other question about the reporting. First, the -- since we've organize the company this way, we're required to report this way in terms of segments, and it's also for increased transparency. I don't think we're prepared at this point to talk about specific numbers for the segments or expectations. But we'll get to that on the next call when we actually report the segments.

Timothy M. Armstrong

Then, Ben, on the other 2 quick questions. On that Google Product lift, our relationship with Google is essentially a joined-at-the-hip partnership where we basically jointly test products and services. The work that they've done in the product area is something that's a long list of stuff that we have for them in terms of testing them. We just -- Artie and I just had -- we met with them recently last week, so you should expect us to adopt more of their products and services, but we do it in a way, which is basically filter down a list of how the relationship works overall. But Google has performed very well, and we expect to adopt more future products. And then on the AOL On front, essentially, our strategy on AOL On is what I'm going to call an object strategy. So if you think of the videos as objects we can send to our properties or other people's properties, we essentially have tried to build a very large video network that serves our owned and operated properties and the syndicated network of our publishers, about 30,000 publishers, that we send to videos to. So you will see tremendous video usage on the owned and operated properties depending on what the topic is and what's happening at AOL On continues to grow as a kind of an anchor property around video. But we also are seeing very strong growth across the network of video. And I think I'm going to say a number here. It could be wrong. I think we were #27 in video views on the web a few years ago, and we were #2 the last 3 months. So I would say we have -- almost like the advertising business, we have a combined owned and operated and network video strategy. And then you see us investing in things like HuffPost Live, but I think depending on the day and depending on the coverage, you would see video views shift around between the network and owned and operated.


Our next question comes from James Cakmak, Telsey Advisory Group.

James Cakmak

First one, you're making a lot of progress on the premium advertising front, Project Devil and video and you state that it wasn't enough to fully offset the pressure on the remnant advertising side. Can you give us a sense of the mix between the 2 advertising buckets? And do you think that as premium grows, are we close to the point where it can fully offset the pressures the remnant, independent of all of those growth initiatives that you outlined in your prepared remarks? And then secondly, on the Alto mail, is this something that is a pet project? Or do you think that you'll be investing in this to attract people outside of the AOL kind of subscription -- membership network?

Timothy M. Armstrong

Yes, specifically, let me give a little deeper dive into advertising so you know why we're comfortable with where we're heading with it based on the numbers you see today. So I think if you -- first of all, the majority of advertising revenue comes from what I would say is the traditional display business overall. The new businesses, video and Devil and those things are very quickly growing. They're sizable. And at some point in the future, they will overtake, I'm sure, the traditional display business. I just want to hammer on a couple of things, though. Although the marketplace is shifting and changing, and it is, on the programmatic and marketing services side, and again we have strategies across both, there are a couple of precise things within our strategy that we have tweaked to make sure that we take advantage of the traditional display business, as well as the new businesses, and let me just hit a couple of those. One is basically the relaunching of AOL lifestyle brands after we had integrated the Huffington Post, which has been wildly successful both on ads and traffic. We also realized there are supplemental areas of our brands that we wanted to basically launch, so that's some of the stuff we talked about in lifestyle. And then specifically also, on the advertising front, we've been verticalizing our products and services. So I think what you're actually going to see over time is the traditional display market, which is not really going to be a growth market, we will continue to eat away at the inventory with the video and premium formats and those things. We will also start to augment the targeting and the product set around the traditional display market to more verticalize with better results for consumers and advertisers there overall. So I think what we're hoping for 2013 really is to have both programmatic and display grow. And on the display side is to really grow from a mix of video premium formats and then really deeply verticalizing the products on our owned and operated sites, as well as launching very significant brands that we have been doing overall. And let me turn it over to Artie on Alto, which is the new e-mail product.

Arthur Minson

Sure. James, look, we don't have any pet projects left at AOL. I mean, one of the things we're really, really focused on is, frankly, getting focused. And we have about 15 people who are working on Alto, and 15 people is a lot of people who are working on any project around the company. We're pleased with the results today. We have about 5,000 people on Alto. We've had requests for about 70,000 people to sign up. It's early days, but the feedback has been very, very good so far.


The next question comes from Stephen Ju from Credit Suisse [ph].

Stephen Ju - Crédit Suisse AG, Research Division

This is Stephen Ju from Credit Suisse. So, Tim, on Patch, it looks like the new format in beta is making increased use of user-generated content, or at the very least, it looks more like a Twitter stream. Have you noticed any change in traffic and whether this new format is more relevant and engaging to the consumer as opposed to the prior? And is there an opportunity going forward to serve up ads directly into the new stream? And Karen, you're not new to the company, but new in the CFO role. So I'm just wondering if you could share with us your thoughts on capital allocation and how that may or may not change with you in the seat.

Timothy M. Armstrong

So basically overall, the new Patch product was built based on requests that we saw coming from the community. And essentially, the platform does a very good job of sort of allowing people to create groups and create kind of instant information. We have roughly about 25,000 bloggers on Patch right now. And we -- the new platform basically mixes the best of news, the best of people who have signed up to be bloggers and the best of community groups and things of how people actually live their lives in town. We have put the new product out in beta. It's been in the 5 towns. What we see overall from the early days are increased usage of user-generated uploads and content, but I want to be specific about that. It's generally around specific groups overall, which we think are powerful. So instead of getting a 20-e-mail chain from your kid's little league baseball team or if you want to follow your school, it allows you to essentially either create a group or follow a group overall. On the other sides of usage both in terms of total traffic and in terms of total page views and those things, it's still early. I would say that they're comparable overall, so I don't think we've seen huge spikes up or down in usage in terms of unique visitors, although I would underline the fact that we have seen big spikes in terms of people getting involved on the platform and sharing content and uploading content. A lot of this is not going to be helpful to you or to us because a lot of the data we're seeing is small, it's only 5 towns, and then Sandy actually affected a bunch of those towns. So I think we're going to continue to work on our plans to roll out to more sites in the future. But Jon Brod and his team at Patch are working very diligently on improving the product. On the ad side of it, there are -- there's 3 or 4 different revenue models. There's 2 that are really specific to the new Patch product overall. And I won't go into detail on them because we haven't announced them yet, but essentially, one is giving businesses direct access to their most valuable customers on a consistent and constant basis, and you will see those within the product show up within the streams and also groups.


The next question comes from Anthony DiClemente from Barclays.

Timothy M. Armstrong

Anthony, can you hold on one second? I just want to make sure that Karen finishes up that last question.

Karen E. Dykstra

Yes, that was a 2-parter, so let me just answer the rest of the question, which is about my philosophy on capital allocation. You're right. I'm not new to the company, but I'm new to the role. I've been with AOL since the spinout in December 2009. I believe in the strategy. I've been in sync with Tim and Artie for years and have and believe we have a tremendous amount of growth opportunity in the businesses, so -- but we have a good cash flow. We continue to convert our cash, and so we have a strong flow of cash and strong cash balances. But like any company, we need to find the right balance of investments and structures and constantly review our portfolio to provide the highest return to shareholders. And I believe we need to continue to consider all options for the allocation of capital, investments in our businesses, share repurchases, dividends. But constant review and be rigorous about our review and updating of that allocation as we see results. I mean, we've mentioned a few times on the call today that we're gearing up for investments in growth and we have some priorities, such as and curated subscription bundles, and there's plenty of others. But basically, my philosophy is that we have to manage for the best return to shareholders, make prudent investment decisions and continually monitor the investments closely and ensure that we're adjusting course. So I wouldn't say it's a change from what has been with Artie and Tim in the past. It's just a reinforcement of the rigor around the process.

Ryan Ripp - Barclays Capital, Research Division

This is Ryan in for Anthony. I was wondering if you could touch on competition in the marketplace, with regard to display and video from YouTube, Facebook, things like that.

Timothy M. Armstrong

Yes, so basically, the competitive marketplace right now across the board, Ryan, looks like, if I compared it to a year ago, there were a set on the display side, which are very big investments in network-based products and services and a lot of money getting spent on data targeting overall. I think in the last year, you've seen Google has continued very strongly to use the DoubleClick platform and also the YouTube platform in the marketplace. I think that's been more on the kind of network side of the business. Facebook, I think we all know that they have made progress and did make progress last year in terms of the display business in general. I would say in the last 3 months, what we see competitively in the marketplace is the fact that grew as a major platform and has major scale is a big strategic advantage to the customers that are still moving to fewer, bigger partners. And we fit into that very well and we have very strong technology there. On the display side, what's happening is, I think as we go into video and premium formats, we are -- happened is -- we didn't happenstance get there. A couple of years ago, we decided this was probably where the market's going to go on that side of the barbell, and now we're sitting with very strong video, #2 in video views, very strong formats in premium display and very strong content brand. Go out and channel check for yourself, call the major agencies, call the major clients. A lot of the stuff we've invested in, I think is going to be the next era of display overall, and it's probably going to take a little while to get going. TV money is definitely going to move. So competitively, I think AOL fits into the top 5 companies people look at and work with, and we want to get into the top 3. And I think we're going to work hard to get there.

I want to also just wrap it up, and thanks, Ryan, for the question, to close off. I wanted to just mention 3 things on ending the call. Number one is I wanted give a very huge shoutout to the AOLers who have basically had the best results in 7 years on the revenue side for us as a business and also got consumer traffic growing, testament to a group of people who have slogged through one of the toughest turnarounds and continue to work really hard. Second thing is just I would say as a management team and as a board, one of our goals last year was to expand both the board and the management team. I think we said last year we were a man down, meaning we had so many things. We had a single-track, big projects, and now with Karen coming on, we're a woman up. I think, overall, now we're able to really solidify the results that we've had. And then the final thing is just we're doing fewer, bigger things as a company. And we're going to continue to do that with Artie's role as COO, with Karen's role as CFO. Also, though, I think you saw us do some big things this year from teams that don't normally -- aren't on these calls, Julie Jacobs and her team on the patent deal, who were the drivers of that. And I think a lot of the different groups around the company that have contributed to the success that we've gotten to so far, we're going to expect even more out of them next year. And overall as a company, I think you'll see us do probably less things than we did in the past, but we'll do them bigger and more successfully.

Thank you for joining the call. And, thanks, Eoin, for hosting.

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