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Yahoo slightly beats expectations but concerns remain

The Internet portal reports third-quarter per-share earnings of 13 cents, sending the shares on a roller coaster ride in after-hours trading.

Web portal Yahoo reported third-quarter profit and revenue that slightly exceeded analyst expectations, sending the shares on a roller-coaster ride in after-hours trading as investor enthusiasm turned to concern.

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How will Yahoo weather dot-com storm?
Yahoo CEO Tim Koogle
Yahoo shares initially climbed but then slumped about 10 percent after the Internet giant announced third-quarter pro forma income of $81 million, or 13 cents a share, for the period ended Sept. 30.

Wall Street expected the company to earn 12 cents a share, according to a survey by First Call/Thomson Financial. The so-called whisper number had Yahoo earning 13 cents.

Yahoo shares closed at $82.69 in regular trading. After the report was released, the shares initially climbed above $86 in after-hours trading, according Island ECN, which tracks late trading on electronic networks. However, the shares fell below $77 after the company held an afternoon conference call with analysts.


Gartner analyst Robert Labatt says that although Yahoo's earnings report raises some concerns on Wall Street, the company will continue as a strong player in the Internet market.

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Safa Rashtchy of U.S. Bancorp Piper Jaffray, who participated in the call, said investors may have been spooked by comments that the company is feeling the effects of the dot-com shakeout, a situation that could pinch revenue until next spring. Investors also were searching for details about Yahoo's plans to tap new revenue opportunities.

"What is a bit of a concern to me is to get more clarity on the new revenue sources, and how revenues can grow beyond what we have in our models," said Rashtchy.

Hoping to allay any concerns, Yahoo chief financial officer Susan Decker said during the call that "pure-play" Internet companies accounted for just over 40 percent of the company's revenues, down from 47 percent last quarter. She added that "financially questionable" advertisers represent less than 10 percent of revenue, but would not disclose the exact percentage.

Decker also noted that the decline in the number of advertisers was a result of "financial pressures facing some of our clients." The top 200 advertisers accounted for 60 percent of all ad revenue for the quarter.

In an interview, Yahoo chief executive Tim Koogle said the outlook for online advertising is very strong, noting that a greater percentage of online marketing dollars can be expected to flow to Yahoo's bottom line in the future.

"We feel very optimistic about our position," he said. "The (Internet) medium continues to get adopted by marketers, including major brands, who continue to spend on the Web. The bulk of that goes to those on the short list of sites able to deliver a significant audience, and Yahoo is on that list."

Koogle also addressed concerns that the company is overly dependent on advertising, pointing out its push to sell a wider range of Internet services such as online broadcasting and Web hosting.

Additionally, he said the company has experienced significant growth overseas, a key component of the its diversification effort. International operations grew from 10 percent of total revenues from the same period a year ago to 16 percent, he said, correcting an earlier statement in the company conference call that had put the number at just 13 percent.

Among the other highlights in Yahoo's report, revenue surpassed $295 million, slightly better than analysts' expectations of $280 million and a 9 percent gain from the second quarter. Page views hit 780 million in September, up from 680 million in June. Registered users reached 185 million, up from 155 million at the end of the second quarter.

The number of advertisers, however, declined in the past quarter from 3,675 to 3,450. But Jeffrey Fieler, an analyst at Bear Stearns, viewed the decline as a positive result for Yahoo.

"I take that as a sign of strength because it means they're increasing the penetration of existing clients, which are stronger, and don't have to lower prices to keep these clients," he said.

Change of pace
Despite investor concerns about future growth, the fact that Yahoo met earnings expectations is an anomaly in a season marked by a series of devastating warnings. Shares in several technology stalwarts such as Intel, Apple Computer and Dell Computer were pummeled recently by earnings shortcomings.

Among Net companies, Priceline.com shares also plunged recently after it issued an earnings warning and said it would close its name-your-own-price gasoline and grocery service. Meanwhile, shares of e-commerce giant Amazon.com on Monday hit a 52-week low of $27.38--well below its 52-week high of $113.

Nevertheless, a crucial issue for Yahoo is the outlook for online advertising. The company has built its business around attracting traffic to its Web site and selling advertising. It has modeled itself as a "must buy" for advertisers, given its high usage and popularity.

The implications of Yahoo's earnings could affect other companies in a sector that is heavily dependent on advertising as a core revenue source. April's market doldrums have scared venture capitalists and financiers from throwing money at Web start-ups to spend on advertising and promotion.

The drying up of advertising dollars among dot-coms has put pressure on Internet heavyweights to secure deals with consumer products advertisers, which are standing on more solid ground. Net advertising is expected to reach $11.5 billion in 2003, up from $4.6 billion last year, with much of that growth from traditional advertisers, according to market researcher Jupiter Media Metrix.

Companies in the sector must convince traditional advertisers that their online real estate has value. Web surfers rarely click on banners that link to advertisers' Web sites, and ad rates for these spots have declined over the years. Web sites are now trying to bridge the gap by working closely with advertisers to offer more results for the dollars.

Yahoo also is trying to tap different sources of revenue, such as licensing versions of its site to outside companies looking to beef up their intranets. On Monday, it unveiled deals with Honeywell, Applied Materials, Intellinex and TCW Group.

"I think it's a respectable quarter," said Jordan Rohan, an analyst at Wit SoundView. "I think they performed well, but I don't think investors are going to be jumping up and down tomorrow (because) they didn't blow away numbers as they usually do."