What’s Next for AOL?

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AOL (NYSE:AOL) was showered with investor affection on Friday following its fourth-quarter and full-year results, released before the markets opened. Shares climbed over 11 percent as the company reported revenue growth for the first time in eight years, spurred by advertising growth at its major web properties such as the Huffington Post and Patch.com.

Briefly, total 4Q revenues grew 4 percent to $599.6 million, while full-year revenues were flat at $2.2 billion. Diluted EPS for the quarter grew an attractive 78 percent to $0.41, but free cash flow decreased 36 percent to $46.3 million. With a strong quarter under its belt, AOL is forecasting full-year revenue growth in 2013.

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Every day, AOL is transitioning away from a subscription-based revenue model and toward a more robust and lucrative advertising-driven model. Growth in ad and search revenue, as well as unique visitor growth, will drive the company toward its 2013 goal. But while the results are tremendously positive and indicate future success, they mask one primary underlying weakness…

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