AOL’s Ad Revenues Down 8% Despite Some Increases

AOL’s total revenues fell by 17 percent year-over-year in Q4 2009, with ad revenues dropping 8 percent, but still beat financial pundits’ low expectations. According to its first earnings report since spinning off from Time Warner, the New York-based company reported a profit of $1.4 million, compared to a $1.96 billion loss for the same 2008 period when Time Warner wrote down the ISP and Web media firm.

The advertising particulars represent a mixed bag for AOL – known as a dial-up ISP for the better part of two decades – as it attempts to rebrand as a content destination that attracts eyeballs and display campaigns.

Overall Q4 ad revenues fell 8 percent, coming in at $471.6 million compared to $512.5 million in 2008 Q4. Domestic display ad sales increased 1 percent year-over-year and by 25 percent compared to Q3 2009. Yet, a broadening of the domestic display line item in AOL’s books was partly responsible for the year-over-year improvement.

CFO Arthur Minson defined domestic display as premium inventory and network sales, “as well as certain legacy content and commerce deals that have not been historically sold by the ad sales force…Additionally on a sequential basis, the improvement was driven by an increase in CPMs.”

Minson cited CPG, finance, and retail as the key verticals for AOL’s domestic display sales. “We added well north of a 150 new advertisers during the fourth quarter,” he said.

Meanwhile, international ad sales fell by 22 percent. The brand blamed the drop on its initiative to scale back global operations as well as lagging markets in the U.K., Germany, and France.

Overall revenue from search and contextual advertising – turf dominated by Google – plummeted 19 percent. AOL attributed the fall to a 27 percent drop in access subscribers, stating that subscribers often search more regularly and monetize better than non-subscribers on its properties.

At the same time, AOL may have beat Wall Street expectations due to subscribers abandoning its Internet service at a slower rate. “The silver lining is that churn dropped to its lowest level in a decade,” Minson explained. “To be clear though, our financial results will continue to be negatively impacted by the fact that our subscription and search and contextual revenue are declining and are projected to continue declining at meaningful rates.”

Staying on the content-focused message that he’s touted for months, CEO Tim Armstrong suggested that AOL’s financial health going forward will partly depend on leveraging, its recently announced content management operation. In essence, his company will continue trying to be seen as a credible source for news articles, entertainment videos, bloggers, etc.

“I think, in general, what it comes down to is user engagement and the ability for us to do high-value properties and high-value integration for brand advertisers,” Armstrong said. “Brands like to connect themselves with strong [consumer] experiences.”

Minson offered up one number that suggested advertisers have started to come around to the idea of AOL offering quality content. “As a percentage of total display advertising revenue, domestic display advertising on AOL properties increased by 32 percent [during] Q4,” he said.

Despite its troubles, comScore data still ranks the brand’s as the leading advertising network. AOL’s audience consisted of 187 million Internet users in December, while Yahoo had 181 million and Google came in with 178 million.

Still, during the morning teleconference, Armstrong remarked: “AOL is the company people are used to kicking around.” And such an “underdog” characterization would be disputed by few in the industry.

To ultimately change that perception, Armstrong stated it’s important for AOL to develop more “sticky” content sites like techie blog EnGadget, which it bought five years ago. “Some people in the world may look at EnGadget as a niche property that serves a very specific technology audience,” he said. “But it serves at scale within that audience. It’s a scale that national advertisers – and even small and medium-sized advertisers – find very attractive.”

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