Yahoo posts strong revenue, earnings

The Web giant beats analyst expectations with a profit of 8 cents a share, in the latest sign of turnaround for the company.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
6 min read
Yahoo reported its third-consecutive quarterly profit, boosted by a 51 percent growth in revenue.

The Web portal reported a fourth-quarter net profit of $46.2 million, or 8 cents a share, on sales of $285.8 million for the period ending Dec. 31, 2002. That compares with a net loss of $8.7 million, or 2 cents a share, and revenue of $188.9 million during the same period in 2001.

"Over the last 12 months, we have executed against a business plan which has taken Yahoo from a company with tremendous potential to one with multiple strong businesses, from which we believe we can continue to build a sustainable long-term future," Yahoo CEO Terry Semel said in a statement.

Wall Street had expected Yahoo to report a profit of 6 cents a share and revenue of $278.6 million, according to First Call's consensus of analysts.

The company also reported full-year 2002 revenue of $953.1 million. That's a 33 percent increase from 2001 revenue of $717.4 million, but short of the $1.1 billion Yahoo generated during the boom year of 2000. Income for the year reached $106.9 million, or 18 cents a share, compared with a net loss of $92.8 million, or 16 cents a share, in 2001.

Earnings before interest, taxes, depreciation and amortization (EBITDA) reached $85.3 million, up from $11.7 million from last year's quarter. Free cash flow also rose to $61.4 million from the $6.4 million loss in 2001.

Yearly EBITDA hit $206 million, compared with a loss of $18.6 million in 2001, largely from restructuring and acquisition costs. Free cash flow for 2002 reached $221 million, compared with last year's $26.6 million loss.

"I think what (Yahoo's earnings report) says is they're getting traction in high-margin revenue," said Safa Rashtchy, an equity analyst at U.S. Bancorp Piper Jaffray.

The gains were due to improvements in several businesses, including premium services and a paid-search deal with partner Overture Services. The Sunnyvale, Calif.-based Web network reported financial results in its three business lines: marketing services, fees and listing, and transactions.

In marketing services, the company's core online advertising business and its high-margin relationship with Overture accounted for $177.5 million in revenue, up 31 percent from last year. Much of this growth was attributed to the deal with Overture, which pays Yahoo every time someone clicks on a commercial search result.

Fees and listing--the business that encompasses Yahoo's 2.2 million paid subscribers and other areas such as enterprise solutions--hit $89.4 million in revenue for the quarter, up 120 percent from last year. However, Wall Street analysts were concerned about slower-than-expected revenue growth compared with previous quarters. Yahoo executives attributed the slower growth to a delay in booking revenue from services that launched late into the quarter.

The Web company did not break out revenue from strictly premium services, but it said 70 percent of its fees and listings revenue comes from personals, e-mail forwarding, e-mail storage and Internet access.

In addition, Yahoo's revenue from hosting e-commerce transactions rose 45 percent, to $19 million, compared with the same period last year. However, the business grew marginally from the $18.3 million reported last quarter.

Jeffrey Fieler, an analyst at Bear Stearns, estimated that Yahoo's core online advertising grew 11 percent from last year, despite continued signs of stagnancy in the industry.

"I think that's an extremely encouraging sign, because growth is broadening out in the main component of their revenue," he said.

Fieler calculated that Overture contributed $35 million to $40 million to the advertising revenue total. Yahoo executives would not break out the contribution, but insisted that the company's online advertising business was growing and grabbing market share from its competitors beyond the Overture deal.

The shape of things to come
Yahoo also provided financial guidance for the first quarter of 2003 and for the year in full. In the first quarter, it expects revenue to reach between $225 million and $275 million and EBITDA to reach between $60 million and $70 million.

For 2003, Yahoo raised its revenue expectations to between $1.14 billion and $1.21 billion. The company expects 2003 EBITDA to fall in a range of $295 million to $330 million and capital expenditures to come in between $70 million and $90 million. Depreciation expenses are expected to reach between $95 million and $105 million.

During a conference call, CEO Semel said he expects further diversification will allow Yahoo's core marketing services business to grow 20 percent in 2003, much of that from its sponsored search deal with Overture.

In addition, he anticipated that the company's current base of 2.2 million unique subscribers would grow by more than 50 percent in 2003.

The past quarter was marked by the mundane, but necessary, process of implementing Semel's turnaround plan for Yahoo. More than a year into the plan, Semel's bet seems to be paying off. The company has turned Web searches into a moneymaker, increased the company's number of paid subscribers, stabilized its online advertising business and instilled a new structure of accountability in its business units.

It's still too soon to tell whether Yahoo's core online advertising business has fully recovered, but Semel has nonetheless stuck to his promise of diversifying revenue into paid services. Although Yahoo has shined a spotlight onto its paid subscription numbers, it has left other previously touted businesses in the dark--namely its enterprise solutions division, which experienced cutbacks last quarter and the departure of its division head.

Yahoo's search business, in particular, underwent changes to address its growing prominence as a cash cow. The company has transformed search--one of the most popular areas visited on Yahoo--into a highly profitable business, predominantly through its deal with Overture. But the area's one potential concern is in Yahoo's relationship with Google, which provides search results for general queries.

The balance of power between Yahoo and Google will likely play itself out in the coming year. Google has become the most popular search engine on the Web, and Yahoo depends on the search results it produces to keep its visitors happy. The company's awareness of Google's growing clout may have been a key driver in its $235 million acquisition last month of Google competitor Inktomi, a move that should let Yahoo create its own search service.

"We need to control our own destiny in marrying front-end data to back-end data," Dan Rosensweig, chief operating officer at Yahoo, said in an interview. "This is a positive step to continue to produce in one of our core assets, which is search."

Google itself has begun taking on a more Yahoo-like form, adding Web services such as an online people-search service, maps, and news headlines to its arsenal.

Another key marker of how Semel's turnaround plan is progressing will be the performance of Yahoo's broadband plans. Semel has vowed that the company will strike distribution deals with multiple broadband providers. But to date, the company has signed only one deal, with SBC Communications, under which it produces a customized front page for DSL (digital subscriber line) customers.

Competitors Microsoft and America Online have already inked deals with key potential broadband partners. Microsoft's MSN has carriage deals with Verizon and Qwest as well as with cable company Charter Communications. AOL, meanwhile, has agreements with corporate cousin Time Warner Cable and cable giant Comcast. It is expected to announce more cable deals in the near future.

Rosensweig conceded that close-knit deals such as the one with SBC are unlikely to become the norm for Yahoo.

"The kind of relationship we have with SBC is now probably a one-of-a-kind," he said. "We have seen and anticipated that market would move to much more of a nonexclusive environment."