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All eyes on Yahoo's ad revenue

Wall Street will be watching closely for telltale signs of flagging online advertising sales tomorrow as the Internet blue chip reports its quarterly financial earnings.

Wall Street will be watching closely for telltale signs of flagging online advertising sales tomorrow as Internet blue chip Yahoo files its quarterly financial report.

By and large, Wall Street is expecting another strong quarter for the portal giant. Analyst consensus estimates are pegging Yahoo to earn 10 cents a share, according to First Call. These estimates equate to roughly $240 million to $250 million in revenues for the quarter, analysts said. Yahoo reported $115 million in revenues for the same period last year.

"We really think this quarter is going to be business as usual for Yahoo," said Paul Noglows, an analyst at Chase H&Q, who expects the company to earn 11 cents a share on revenue of $249 million.

Santa Clara, Calif.-based Yahoo is ending the quarter on the heels of successive analyst reports warning of expected weakening in ad revenue growth. As an Internet bellwether, the company's performance could have repercussions for legions of dot-coms that depend on ad sales as their primary revenue streams.

"People are nervous about advertising and how many of these companies will survive," says Safa Rashtchy, an analyst at Piper Jaffray. "We were in the land-grab mode, and we're now shifted to the profit phase. Obviously some companies will be dropped out."

Online ad sales have grown about 150 percent a year since 1996 to $4.6 billion in 1999, according to the Internet Advertising Bureau. Adjusted for inflation, Web ad sales have outpaced comparable growth for broadcast television in its first five years, according to the IAB, and surpassed outdoor ad sales in total dollars spent in 1999.

While analysts say the long-term outlook for online ad sales remains strong, they do not expect growth to continue at the same rate.

"The second quarter will see a slowing of growth in terms of total Internet advertising," said Rich LeFlurgy, chairman of the IAB. But he added that the real measure for the year's performance won't come until the fourth quarter, traditionally the biggest spending period for advertisers. "I'm not worried about the long-term prospects of Internet advertising," he said.

In a recent report, Jupiter Communications predicted online ad sales will continue to rise, hitting $11.5 billion in 2003.

Some question the impact of tighter dot-com ad budgets on Internet ad sales Portal addiction overall. The IAB reported that traditional consumer companies accounted for the largest proportion, 31 percent, of Web ad sales last year, while new media companies accounted for 12 percent.

"I'm a little confused where these signs of a slowdown are coming from," said Pete Petrusky, director of new media for PricewaterhouseCoopers, which conducted the IAB study.

Short term, however, the expected slowdown has lead an analyst to lower her rating on Yahoo.

Last Friday, Deutsche Banc Alex Brown analyst Andrea Williams Rice downgraded Yahoo to "buy" from "strong buy." Rice, who expects the company to earn 11 cents a share on $245 million in revenue, said the shortage of advertising spending among cash-strapped dot-coms would result in lower revenue growth for Yahoo in the coming months.

Last month, Merrill Lynch Internet analyst Henry Blodget also raised warning flags, predicting lower-than-expected revenue growth because of the sour market. Should these warnings turn into reality, they would show that even a Web heavyweight is not immune to a market downturn.

Chase H&Q's Noglows said some of these predictions may be premature. Ad sales are concentrated in the hands of a few top Web sites, and Yahoo remains the most highly trafficked Web portal. The top 10 sites, including Yahoo, accounted for 70 percent of online ad revenues, according to the IAB, while the top 50 captured 94 percent.

More recently, Yahoo has increasingly looked outside of advertising for revenue sources. The company recently launched Corporate Yahoo, a program to sell customized versions of its Web portal for internal corporate use. It also continues to see strong growth in its international operations, especially in Japan.

"I think people are getting ahead of themselves," said Noglows, noting that one-third of Yahoo's advertising revenues comes from other Net companies. "This isn't to say there won't be any impact from dot-com advertising, but we think this company has the situation well in hand."

Pacific Crest Securities analyst Jeff Goverman echoed these sentiments, saying that the Internet remains "the ultimate direct-marketing mechanism." Furthermore, traditional companies are turning to the Web to get their messages across, and many are turning to Yahoo as their must-buy.

"If you think about advertising on the Internet, we're still in the top of the first inning," Goverman said.

News.com's Evan Hansen contributed to this report.