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THE DAY AHEAD: Is Yahoo lowballing Wall Street?

COMMENTARY -- Nearly every Internet analyst on the planet expected Yahoo! (Nasdaq: YHOO) to lower its estimates for the first quarter and 2001. And now that Yahoo actually lowered its sales and earnings targets, analysts don't want to believe CEO Tim Koogle and company.

Go figure.

Yahoo met earnings expectations, but the outlook for 2001 didn't exactly fit into Wall Street's fancy financial models -- the guidance was worse. Much worse.

Wall Street projected 2001 earnings of 57 cents a share and expected guidance to come down a dime or so. Yahoo said it expected 33 cents to 43 cents a share in the fiscal year.

Wall Street projected 2001 sales of $1.42 billion, but Yahoo said it expected sales of only $1.2 billion to $1.3 billion.

The first reaction to Yahoo's guidance could be summed up by "look out below." The conference call had a different vibe. There was evidence of some serious game playing with analysts. Ahead of the results, the ever-bearish Lehman analyst Holly Becker said there would be a string of revenue revisions by Yahoo.

But I wouldn't count on it. Yahoo lowered guidance enough to accommodate a worst case scenario last night. Yahoo's strategy is clear -- take your hit now, lower guidance big time and surprise folks once expectations fall through the floor.

Yahoo executives are known to be conservative about the company's outlook and they didn't disappoint. Some analysts questioned Yahoo's outlook for the first quarter and asked whether officials were lowering expectations too much just to look good later. Look for a lot of conflicted reports today.

Morgan Stanley analyst Mary Meeker argued that Yahoo was lowballing. She said the environment was less competitive, dot-com advertising has declined as a percentage of revenue and ad rates are holding in many areas for Yahoo.

Koogle's reply. "We are trying to be prudent managers," said Koogle. "We are trying to gauge things just like you. We are trying to lay out a plan that's very prudent."

Here's what Koogle should have said: We're trying to save an upside surprise for later.

Koogle didn't answer Meeker's question directly, but noted that the economy and capital constraints for start-ups are short-term problems. "We see the market reaccelerating in the second half," said Koogle. "We're more conservative than third parties. If growth is higher we should benefit."

Well, duh. Koogle knows the game. Analysts had already expected something bad and Koogle gave them something worse. Once all the analysts adjust their models, things can only look up -- at least in theory. At some point -- possibly in the second half -- analysts such as Becker will have to say that Yahoo is likely to deliver an upside surprise. In a few months, most investors will completely forget how Yahoo lowered estimates last night.

Aside from the Wall Street game, there were a few things to worry about. CFO Susan Decker said pure-play dot-com customers accounted for roughly 33 percent of sales in the fourth quarter, down from 40 percent in the third quarter. Nice improvement, but that's still way too much.

And then there's the one-time write-off for money-losing investments. Decker attributed the loss to shares exchanged with Net2Phone (Nasdaq: NTOP) in their partnership. Yahoo posted a non-cash loss of $97.8 million, or 17 cents a share, because of the $138.5 million investment income loss.

Speaking of double talk

While we're on the topic of silly analyst games, Cisco CEO John Chambers put on quite a display on Wednesday.

With Cisco (Nasdaq: CSCO) shares reeling from a downgrade from CIBC World Markets, Chambers stepped up to the plate at a Morgan Stanley conference and delivered plenty of mixed signals.

Chambers wants it both ways -- he wants to acknowledge that a slowing economy could hurt Cisco, but still wants to portray the company as the best of the networking bunch.

"Is the economy slowing? Absolutely," said Chambers. Cisco's second quarter is "a little bit more challenging" because of the slowdown and the company lacks "good visibility into the next two quarters," he said.

But Chambers doesn't want you to get too worried. "Let me say this directly, our customers business is slowing, not our business with customers," said Chambers.

Although he noted Cisco wasn't immune to a slowdown, which occurred "at a faster pace than people realize, he added that the networking giant "won't be as affected as some segments of the IT community."

And just to follow up. Chambers sang that familiar "the industry will grow between 30 percent and 50 percent" tune and noted that he expects Wall Street to cook up a wide range of outcomes for Cisco. Who can blame analysts for being off the mark? You'd have to be psychic to figure out what Chambers was trying to say.TDAIN

• Yahoo lowers 2001 outlook, shares slide
• Cisco sees 'challenging' quarter
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