AOL Earnings Preview: User Growth Key In The Competitive Landscape

| About: AOL Inc. (AOL)
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AOL (NYSE:AOL) is expected to announce its earnings for Q4 2012 on February 8. While it started out as a big player in the dial-up Internet space, it has been forced to transition into a company that relies on content and ads to drive revenues. During the fourth quarter, AOL continued to focus on its content and ads strategy by launching a new social element to its maps service. (See AOL Launches Mapquest Discover to Strengthen Social Offerings)

During the earnings call, we will watch for improvements in AOL’s display ads business, which makes up around 50% of its total value. We will specifically look at metrics like unique visitors and page views per unique visitor across AOL and third party properties. In addition, we will look for more color on the company’s social strategy going forward.

See our complete analysis of AOL here

Q3 Highlights

The AOL stock surged 20% after the third quarter earnings announcement. The firm posted relatively encouraging results which included year-over-year advertising revenue growth of 7%, the highest growth rate in over 7 years. It reported an 8% increase in search and contextual advertising revenues, which was the division’s first growth quarter in over three years.

While a bullish sentiment surrounded the stock after the earnings release, it is important to note that the company saw no growth in total revenues year-over-year during Q3 and that its revenues for nine months ended are still down for the fiscal year. We remain cautious about its overall business and will start believing in a turnaround if the company continues to post growth in key segments over the next couple of quarters.

User Engagement Important to Drive Page Views

During 2012, AOL implemented re-designs to its email platform, its social network Patch, and launched a new social element to its mapping service, Mapquest Discover. In our opinion, all these changes were made in an effort to increase user engagement across AOL properties and provide a more streamlined user experience. These changes are important for AOL’s overall financial health as they not only increase the unique visitor count but also drive page views across its properties.

We will closely watch the impact that these new services have had on AOL’s top-line. The email platform redesign has been in place since two quarters, and we are keen to know if AOL was successful in retaining existing or attracting new users. We currently forecast that the page views per unique visitor on AOL properties will stay flat over our forecast period. However, due to these re-designs and changes, if the metric rises to around 150 in 2013 and to 200 by the end of our forecast period, we could see 10% upside to our price estimate.

Strategies For Improving Social Products A Must

In our opinion, a strong social offering will help AOL attract new users and drive page views. However, the company has largely missed out on the social trend due to absence of a fairly large social network. Since the company has heavily invested in Patch, we will closely watch its metrics during the earnings call.

Patch is a relatively weak social network compared to Facebook (NASDAQ:FB) and Google’s (NASDAQ:GOOG) Google+ (see Patch’s New Look Still Leaves It Inferior To Competitors), but we would like to see some revenue and visitor growth from the site in Q4 2012 and beyond. Additionally, we hope to see a strategy from the management that will focus on ‘socializing’ existing AOL properties (like it did with Mapquest Discover) and an integration of all AOL services into one social portal.

We currently have a $24 price estimate for AOL, which is approximately 20% below the current market price.

Disclosure: No positions.