Has AOL (NYSE: AOL) returned to the top tier of digital media companies? The CEO says "yes," but the second-quarter earnings report says "no."

On the one hand, it is hard not to be impressed with the ambitious agenda of the company's CEO, Tim Armstrong. AOL captured plenty of attention when it purchased the Huffington Post news and commentary website earlier this year for $315 million.

AOL is also betting that Patch, its network of hundreds of hyperlocal news websites, will be able to tap into the community audiences that financially strapped newspapers are less able to serve. AOL bought Patch -- which Armstrong was an initial investor in -- after he became CEO in 2009. Previously Armstrong had been an executive at Google (Nasdaq: GOOG).

Yahoo! (Nasdaq: YHOO) and Google are also competing for local online advertising revenues, which are expected to be in the $15 billion range.

But on the other hand ...
Unfortunately, AOL's disappointing second-quarter earnings report precipitated a 26% drop in share price.

Some of the bad earnings news:

  • Revenue fell 8% to $542 million compared to the same quarter last year.
  • The company saw a net loss of $11.8 million.
  • Free cash flow fell 43%.
  • Subscription sales declined 23%.
  • And to top it off, AOL saw a 20% decline in "other" revenues (from mobile email, mobile instant messaging fees, and licensing fees).

However, it wasn't all bad.

Advertising revenue was up 5% from the same quarter a year ago. But ... there's a caveat to that silver lining: AOL is losing market share in U.S. display advertising revenue. Marketing researchers expect revenue to fall to 4.2% for 2011, a decline from 2009's 6.4% and last year's 4.8% slice.

Google's share of online advertising is expected to be over 9%, and Facebook's to be closer to 18%.

The CEO's take
On the conference call after the earnings report came out, CEO Armstrong gave his opinion on the company's performance. As the Johnny Mercer song implores, he accentuated the positive.

In Armstrong's words:

  • "AOL is a healthier company today than it was a year ago."
  • "... for the first time in three years, AOL grew global advertising revenue."
  • "Revenue growth will precede profit growth and we have revenue growth on the move."
  • "The Huffington Post traffic surpassed The New York Times during the quarter, nearing 10 million monthly unique users."

My take
Getting out alive from that ill-conceived, magnificently flawed merger with Time Warner (NYSE: TWX) was just the beginning for AOL's resurgence as an online power. Armstrong may be a bit aggressive in his apparent hurry to make AOL into the once and future online king, but halfhearted measures won't produce anything but regrets here. The company  has a lot of catching up to do.

I applaud AOL's efforts, but I'm going to hold off for now on making an investment in the company. Its extreme makeover is still a work in progress, and I think I'll take this one a quarter at a time.

Follow AOL along with me. Put it on your Watchlist by clicking here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.