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THE DAY AHEAD: Yahoo!: Slowdown? What slowdown?

COMMENTARY -- In its most anticipated earnings report ever, Yahoo! easily beat the over-under revenue number of $290 million in the third quarter.

Wall Street usually uses terms like "whisper numbers" and "consensus estimates," but gambling terms may be more appropriate. A lot of folks were clearly betting against Yahoo in its third quarter. And a bunch of Net stocks were riding on where Yahoo's quarter landed.

The conventional wisdom went something like this: The online ad slowdown is for real and it's going to hit everyone -- including ad-dependent Yahoo. Investors were clearly worried. That's part of the reason why Yahoo shares are trading near 52-week lows. If you bought Yahoo at $132 two months ago, you're out of luck. If you bought shares back in March at more than $200 split adjusted, you're really out of luck.

But Yahoo's results shot down most of the worries that were surrounding the company's earnings report.

Now the big questions: Where does Yahoo go from here? Did Yahoo allay fears about online ad spending? You might as well head back to the roulette table as the bulls and bears duke it out.

The numbers

Like most Yahoo quarters, there isn't a lot to complain about. Yahoo, which sits at the top of the Internet food chain, will continue to do well because it's the biggest.

Yahoo reported earnings of 13 cents a share, excluding charges, on sales of $295.5 million. The over-under revenue number was about $290 million, said several analysts. If Yahoo topped that sales benchmark, investors would be pretty optimistic. If Yahoo missed its numbers, it could have been ugly.

Ahead of Yahoo's earnings release there were plenty of stats to toss around. Merrill Lynch analyst Henry Blodget predicted an official revenue total of $280.6 million, but noted that "upside of $10 million is possible." Page views came in a little better at 780 million a day in September. Blodget predicted page views of 741 million. Unique users came in at 166 million, slightly above expectations.

What you should note about Yahoo's results are the company's international growth figures -- Yahoo figures most of its growth will come from abroad. On the international front, Yahoo also made the grade. Yahoo's international sites -- led by Yahoo Japan -- showed strong gains and accounted for 16 percent of the company's sales.

The outlook

Yahoo's results were a relief, but were hardly the focus. All eyes were on Yahoo's fourth quarter outlook.

And as usual, executives were a bit cryptic. There were so many Yahoo-isms that the truly cautious may remain that way. However, there was enough color to give investors a few reasons to be bullish.

Here's the big takeaway: Yahoo said 40 percent of its global revenue derived from pure play dot-coms in the third quarter, said Chief Financial Officer Susan Decker.

That tally, down from 47 percent in the second quarter, is a big chunk of change, but the percentage is headed in the right direction. Decker reiterated that less than 10 percent of Yahoo's revenue derives from questionable dot-coms. She also noted that some dot-com clients face funding problems, but others are thriving. Yahoo’s top 200 clients, mostly traditional businesses, account for 60 percent of sales.

CEO Tim Koogle and Chief Operating Officer Jeff Mallett both noted that Yahoo will extend its leadership and leverage its platform into the enterprise and a bunch of other areas. Koogle stumped for Yahoo's "integrated marketing solutions." Yahoo will stand to benefit amid natural consolidation of ad spending, said Koogle.

More detail on the fourth quarter was hard to come by, but the consensus reckons the upcoming quarter will be strong.

Arthur Newman, an analyst at ABN Amro, said in a note ahead of Yahoo's results that he expected worries about Internet advertising to remain no matter what Yahoo reported. Judging from the outlook, it looks like Newman is on target.

Picky, picky

I hate to be picky sometimes, but ...

  • This was the first quarter Yahoo revenue didn't double year-over-year. It was up 90 percent.

  • Does sequential growth of 8 percent justify the valuation?

  • Yahoo enabled $1 billion in e-commerce transactions with what looks like a big bump from Yahoo Japan. That $1 billion is flat with the last two quarters. Given e-commerce is so important to Yahoo's future, a little more traction would be nice.
TDAIN


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