AOL's advertising alive and kicking

AOL transition from a subscription service to largely free broadband portal is being eased by a surge in advertising revenue.

The bad news: Revenue fell 35 percent to $1.5 billion largely because of a $665 million decrease in subscription revenue. That tally is expected since AOL is offering its products free of charge to broadband users.

The good news: Advertising revenue was up 35 percent due to "strong growth in sales of advertising on partner sites, as well as display and paid-search advertising on the AOL Network." That advertising revenue growth excludes one-time benefits. AOL is also targeting new markets like India.

The good news: Adjusted operating income before depreciation and amortization was $542 million primarily due to lower marketing, down $274 million, and network costs, down $220 million. AOL doesn't have to send disks in the mail or expand its network since it's downplaying dial-up access.

The so-so news: AOL's departure from the dial-up business will take time. AOL still has 12 million U.S. access subscribers (who are these people?). That sum is down 1.2 million from the prior quarter, but at that rate it's roughly 3 years before AOL is completely an advertising based business. Compared to a year ago, AOL lost 6.6 million subscriptions. What's truly comical is that people are paying AOL for services that are available for free.

"All of the upside to both revenue and EBITDA was due to a slower than expected decline in subscribers in packages that are available for free or lower prices. We believe that this is likely a near-term positive rather than something that will drive long-term value for the company," said Morgan Stanley analyst Benjamin Swinburne in a research note. 

The good news: AOL has plenty of pages to monetize. AOL had 111 million unique users a month during the first quarter and 44 billion domestic page views.  

Overall, AOL seems to be on the right track.