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Tech Industry

Yahoo keeps up profit streak

The Internet heavyweight reports a profit of $65.3 million for the past three months, beating analyst targets and marking its sixth consecutive quarter in the black.

Yahoo on Wednesday reported third-quarter earnings that beat Wall Street expectations, helped by its paid search partnership with Overture Services and signs that online advertising is improving.

The Web portal giant said it posted a net profit of $65.3 million, or 10 cents per diluted share, on $356.8 million in revenue for the quarter ended Sept. 30. That compares with $28.9 million, or 5 cents per diluted share, on $248.8 million in revenue during the same period last year.

Wall Street analysts expected Yahoo to report a profit of 9 cents a share on $335.7 million in revenue, according to a survey by First Call.

The company's operating income before depreciation and amortization--what was formerly known as earnings before interest, taxes, depreciation and amortization (EBITDA)--totaled $116.5 million, up from $59.2 million in the third quarter of 2002.

The results mark Yahoo's sixth consecutive profitable quarter. The company saw problems in 2001, when its revenue and profitability plummeted as a result of the implosion of the online advertising business. But that income source has since been replaced by fast-growing businesses such as its partnership with search company Overture. That alliance has helped fill Yahoo's coffers and now contributes 20 percent of the Web company's overall quarterly revenue.

"Yahoo is executing extremely well right now," said Derek Brown, an analyst at Pacific Growth Equities. "In addition to that, it's clear that they've got a strong tailwind in terms of their online advertising market, helping to push them along."

On Tuesday, Yahoo closed its acquisition of Overture for $1.6 billion in cash and stock. Overture will become a subsidiary of Yahoo.

"As we more fully take advantage of the revenue potential across our entire business, we believe we can continue to meet our long-term objective for superior, consistent and sustainable growth," Yahoo CEO Terry Semel said in a statement.

Results for Yahoo's businesses were mainly upbeat despite some disappointment.

• Marketing services: Revenue reached $245.1 million, up 48 percent from the same period last year, and an increase from $219.2 million reported last quarter. Yahoo executives would not break out what percentage came from its paid search relationship with Overture and what percentage was from branded online advertising. But Yahoo Chief Financial Officer Susan Decker said in an interview that paid search revenue surged 100 percent from last year, while branded and other marketing services rose 20 percent.

After this quarter, however, Yahoo will discontinue separating sponsored search from the rest of the results. Decker said paid search features will be embedded throughout Yahoo's network of Web sites and no longer just part of its search engine. Thus, sponsored search will become a central part of the company's business and will not be a distinct business line.

"It's an artificial distinction since pay for performance is related to everything else," Decker said.

• Fees: Revenue from Yahoo's collection of paid services rose 38 percent from last year to $79.4 million and showed a quarterly gain from $69.9 million. Yahoo executives said much of the increase was from adding new subscribers to Yahoo Personals, small busines and premium e-mail, and its co-branded access services with SBC Communications. The company's live event Webcasting business again showed declines. At the end of the quarter, Yahoo had 4.2 million domestic paid subscribers. That number may increase to as high as 5 million by the end of the year.

• Listings: Revenue that comes primarily from Yahoo's subsidiary hit $32.4 million, a 26 percent increase from last year, but flat from the previous quarter. Decker said much of the flatness was due to the poor employment market.

Yahoo also upwardly revised its quarterly and year-end revenue guidance--but with a caveat. The company will include revenue generated from Overture, but it will exclude so-called traffic acquisition costs (TAC), or the money Overture pays its search partners. Overture's business model involves partnering with Web sites such as Yahoo and sharing revenue with those partners.

For the fourth quarter, Yahoo expects revenue, excluding TAC, to reach between $462 million and $502 million. For the year, Yahoo expects revenue of between $1.42 billion and $1.46 billion, excluding TAC, up from previous estimates of between $1.26 billion and $1.31 billion.