Yahoo earnings beat expectations

Yahoo (YHOO) today beat analyst expectations for the December quarter, as traffic swelled and permanent ads continued building out its revenue model.

Excluding the acquisition of free email provider Four11, the company reported net profits of $2.6 million, or 5 cents a share, compared with profits of $96,000 for the fourth quarter a year ago. Analysts had expected earnings of 3 cents per share, according to First Call.

Including the $3.9 million acquisition charge, net loss for the fourth quarter of 1997 was $1.3, or 3 cents per share.

Revenues reached $25.1 million for the quarter, almost tripling the $8.9 million figure reported a year ago. For the fiscal year, Yahoo reported revenues of $67.4 million and net profits of $2.2 million, or 4 cents a share, compared with revenue of $19.7 million and a net loss of $4.3 million, or 11 cents a share, in 1996. Including one-time charges, fiscal 1997 net loss was $22.9 million or 53 cents per share.

Yahoo's traffic grew to an average of 65 million page views per day during December of 1997, compared with an average of 50 million page views per day during September of 1997.

The company maintained its title as the most popular site on the Web for December, and is trying to leverage that popularity by building out its revenue model with more alternatives for advertisers.

The strategy seems to be paying off.

Advertising revenue from its premiere partners program, which offers prime "real estate" spots on its site, accounted for 15 percent of the company's revenue during the quarter, up from 12 percent of revenue during the third quarter. Analysts say such spots are going to be an increasingly valuable revenue-generator.

One example of this type of real estate advertising is Amazon.com's (AMZN) permanent spot alongside the search results on Yahoo's site. Yahoo expects to net a portion of book sales generated through this permanent ad spot.

The majority of the revenue from these deals, however, is generated from the price of the permanent ad placement, and not from the resulting transaction fees, Yahoo CFO Gary Valenzuela said in an earlier interview.

Analysts agree that the real gold mine in chalking up such real estate stems from the deals themselves. Yahoo currently has ten such advertising deals; partners include Amazon.com, CDNow, VideoServe, Autoweb, and four online brokers.

"For right now, real estate revenue is fine. They don't have to make transaction revenue [from these deals], just increase the value in that real estate," said Henry Blodget, an analyst at Oppenheimer & Company. "When they drive more traffic to those renters, the rent will go up."

Blodget said he expects certain segments of the company's revenue to continue growing. For example, during the third quarter, ad placements accounted for $2.1 million of Yahoo's revenue, and that figure rose to $3.8 million during the December quarter. He noted that ad placements will continue to be an increasing piece of Yahoo's revenue pie, and predicted that by next year they could make up as much as 20 percent of the company's total revenues.

Yahoo also has seen a shift in the kinds of companies that are signing up for an ad spot on the navigational giant's site.

Consumer brands now account for 82 percent of the 1,700 consumer-related advertisers on Yahoo, up from 75 percent to 80 percent just last quarter. A year ago that number was flip-flopped, when technology ads made up the same bulk of the advertising. Jeff Mallet, Yahoo's chief operating officer, said that, just as in the offline world, as the Web gets more of a mass audience the vast majority of advertising will be driven by consumer-based companies.

Blodget said Yahoo has done a great job of diversifying its advertising base, and credits some of that action to the company's sales team. Mallet said the company is, in fact, starting to benefit from Yahoo's efforts to build out its sales force last year.

When consumer brands consider spending money online, they want to advertise on a heavily trafficked site that has a broad reach of viewers. That is Yahoo, said Blodget. Eventually, consumer sites expand advertising to other search sites as well, but Yahoo initially will get the bulk of the consumer advertising.

Yesterday, Yahoo announced it was getting into the Net access business through a deal with MCI. The service, tagged Yahoo Online, which will roll out later this quarter, will be powered by MCI and will feature Yahoo's content aggregation.

Yahoo also announced that it will offer its members a free personal home page service from GeoCities.

One year ago today, Yahoo's stock closed at just under 14 a share. Today the stock closed at 67-1/32, up 1-1/4 from yesterday's close, a gain of about 370 percent for the year.