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AOL's U.S. Display Ad Sales Lag, But Video Revenue Is Growing

Video Ads to Become $100 Million Business In 2012

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AOL's display advertising business sagged again in the third quarter of 2012, but strong performance in other parts of the business helped the company beat Wall Street expectations on both revenue and earnings per share.

Revenue for the quarter was flat compared to the same period last year at $532 million, AOL's best result in more than seven years, the company said, beating analyst expectations of $522 million. Earnings per share were $0.22 , compared to analysts' expectations of $0.17 a share. AOL's stock rose 8% to $38.72 in morning trading.

Overall display advertising fell 1% in the third quarter year-over-year, from $137 million to $135 million. U.S. display ad revenue dropped 3%, from $126 million to $123 million. But AOL CEO Tim Armstrong said the company expects the overall display numbers to improve as the company continues to increase the sell-through of its bigger, more content-centric ad formats that command higher CPMS, and focuses on selling more video-ad inventory.

Mr. Armstrong said AOL video revenue should be about $100 million in 2012, thanks in large part to the acquisition of 5min, the video-syndication network. Two years ago, prior to the acquisition, AOL brought in about $10 million in video revenue, Mr. Armstrong said.

Overall ad revenue on AOL owned and operated properties rose 2% year-over-year, from $222 million to $227 million thanks to an 8% increase in search and contextual revenue.

The third-party ad-network business performed strongly again, growing 18%, from $96 million to $113 million. Half of that growth was organic, and half came from AOL establishing a closer relationship with and ownership stake in Ad.com Japan. Mr. Armstrong said the company will continue to roll out ad-tech products that help both advertisers and publishers deal with the rise of real-time bidding.

Earlier this year, AOL unveiled a demand-side platform product to help advertisers buy large, targeted swaths of ad inventory across different sites using real-time bidding.

In a followup phone call, Mr. Armstrong was asked whether AOL would make any additional ad-tech acquisitions, specifically technology that helps publishers make more money from remnant ad space, such as Rubicon Project or Pubmatic.

"You should assume, as the second-largest advertising stack right now, that we will iterate the current stack and also build and acquire things … to fill out any components that are missing," he said.

Mr. Armstrong said that AOL isn't ruling out ad-tech acquisitions. Google bought the third player in that space, Admeld, earlier this year.

AOL believes it needs to excel in ad tech. Mr. Armstrong said a few of AOL's largest advertising partners are already allocating 10% to 20% of their total digital ad spend to programmatic ad buying. He said he expects that number to rise as high as 40% in the next few years.

The company said Patch, its network of more than 800 local-news sites, is still on track to be profitable by the end of the fourth quarter in 2013. AOL Chief Operating Officer Artie Minson said the company has slashed Patch's expenses by 30% year-over year. Asked in a follow-up call if that means Patch's expenses are still about $100 million a year, Mr. Minson replied: "You're in the zone there on what we are spending on Patch."

Mr. Armstrong had previously told Ad Age that Patch would eventually aggressively launch commerce and listings businesses on the platform. Today, he would only say, "We have multiple products in the pipeline connecting local consumers and merchants."

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