IP Democracy: Contrary View on AOL -- Key Stats Trending Down

OK, Time Warner released its Q1 07 earnings report this morning and, once again, the lede on so many press reports is that AOL’s turn-around strategy is a success. (Check out this Forbes piece with the headline “AOL Strategy Boosts Time Warner” or this CNNMoney piece which starts out saying that AOL, along with cable, deserves thanks for Time Warner’s better-than-expected earnings or this ZDNet report that concludes AOL seems to be on the right track.)

But, a cold, hard look at AOL’s numbers doesn’t lead me to any of these conclusions. In fact, from where I sit, AOL is slipping. Sure, year-over-year ad revenue increased by 40% to $549 million, but AOL’s ad revenue actually dropped by $17 million from Q4 06 to Q1 07. In comparison, from Q4 05 to Q1 06, AOL’s ad revenue jumped by $13 million, so I don’t think we’re looking at a seasonal decline.

And, AOL’s operating income before depreciation and amortization — a key profitability statistic — grew by 22% year-over-year to $542 million as marketing and dial-up network costs decreased. These costs, by the way, only decreased because AOL is focusing on its free portal business and jettisoning the costly all-in-one access business. AOL lost 1.2 million paid subscribers during the quarter, an expected drop that nonetheless was somewhat lower than the company expected.

Aside from the two bright spots — YOY ad revenues and OIBIDA increased — everything at AOL looks like it’s on the downswing to me. Take a look at some worrisome trends:

—Overall revenues dropped by $398 million as the number of paid subscribers plummeted.
—Average monthly unique visitors stayed flat at 111 million despite the big push to drive traffic to AOL’s sites.
—Average revenue less TAC per unit dropped sequentially for the first time in five quarters by $.14.
—Total page views dropped for the fifth straight quarter, declining by 425,000 during Q1 07.
— Monthly page views per unique visitor dropped for the fifth straight quarter, slipping by 1,000 during Q1 07.

Hello? With all the effort that Time Warner has put into turning AOL into an Internet advertising juggernaut, beefing up the high-profile videos shown across the AOL networks and forging pacts with big-ticket partners, why are all these things trending in the wrong direction? How will ad revenues continue to grow if page views continue to decline and unique visitors stay flat, or worse, decrease?

During Time Warner’s earnings call, Time Warner President/COO Jeff Bewkes predicted growth ahead in AOL’s performance, noting that a lot of key initiatives, such as the inclusion of ads in AOL’s email platform, will fully kick in this year. However, don’t look for the kind of YOY 40% ad revenue growth that AOL posted in Q1 07, Bewkes warned.

Well, unless there’s some kind of blockbuster growth ahead, AOL looks like a stinker to me. But apparently I’m alone in my views — the press and some investment banking firm analysts are hepped up on AOL’s performance.

AOL Selected Statistics ($ in mil, except per sub.)
	1Q06	2Q06	3Q06	4Q06	1Q07
Total U.S. AOL Subs.	18,640	17,664	15,198	13,183	11,999
Net Change	(835)	(976)	(2,466)	(2,015)	(1,184)
% Change	-4%	-5%	-14%	-13%	-9%
Total AOL Ad Revenue*	$    392	$    449	$    479	$    566	$    549
Net Change	$      13	$      57	$      30	$      87	$    (17)
% Change	3%	15%	7%	18%	-3%
Total AOL Revenue	$ 1,981	$ 2,046	$ 1,983	$ 1,856	$ 1,458
Net Change	(31)	65	(63)	(127)	(398)
% Change	-2%	3%	-3%	-6%	-21%
Domestic Ad Revenue (Less TAC)	$    275	$    295	$    304	$    361	$    345
Net Change	$     16	$     20	$       9	$     57	$    (16)
Avg. Mo. Unique Visitors (mil.)	107	113	112	111	111
Net Change	(2)	6	(1)	(1)	-
Ad Revenue Less TAC Per Unit	$   2.56	$   2.62	$   2.71	$   3.25	$   3.11
Net Change	$   0.18	$   0.06	$   0.09	$   0.54	$ (0.14)
Total Page Views (mil.)	52,634	51,665	48,692	44,383	43,959
Net Change	(893)	(969)	(2,973)	(4,309)	(424)
Monthly Page Views/Unique Visitor	163	153	145	133	132
Net Change	(1)	(10)	(8)	(12)	(1)
Domestic Ad Revenue Less TAC Per    1,000 Page Views	$   5.23	$   5.71	$   6.24	$   8.13	$   7.85
Net Change	$   0.40	$   0.48	$   0.53	$   1.89	$ (0.28)
OIBIDA	$    444	$    505	$    563	$    302	$    542
Operating Income**	$    265	$    329	$    390	$    910	$ 1,084
*Includes a one-time $19 benefit from an accounting change for Q1 07
**Includes a one-time $670 million gain from the sale of AOL Germany and lower depreciation ($22 million) and amortization ($11 million) costs.
Source:  Emerging Media Dynamics, Inc. analysis of company data.  © 2007.

Posted by Cynthia Brumfield on May 2, 2007 12:51 PM to IP Democracy