Yahoo profit doubles

Rising Web advertising pushes search giant's first-quarter Net income to $205 million.

Stefanie Olsen Staff writer, CNET News
Stefanie Olsen covers technology and science.
Stefanie Olsen
3 min read
Internet media company Yahoo on Tuesday reported that its first-quarter profit doubled on soaring revenue from Web advertising.

The company's net income for the period ended March 31 was $205 million, or 14 cents per share, on revenue of $821 million. That compares with net income of $101 million, or 7 cents per share, on revenue of $550 million in the same period a year ago.

Analysts expected Yahoo to earn 11 cents per share on revenue of $796.8 million, according to a survey by Thomson Financial. The revenue figures exclude certain costs.

At the close of regular trading, Yahoo shares were up 65 cents to $33.20. The earnings report was issued after the close of regular trading. In after-hours trading, Yahoo shares were up about 5 percent to $34.81.

"We've raised the bar even higher in the first quarter," Yahoo CEO Terry Semel said during a conference call. "We have a healthy business model and...we're in an excellent position to take advantage of all forms of advertising on the Internet."

Sunnyvale, Calif.-based Yahoo derives the lion's share of its revenue from advertising, which includes paid search, brand ads and rich media. Sales from Yahoo's marketing services were just over $1 billion for the first quarter of 2005, a 54 percent increase compared with the same period last year. (The company does not break out paid search figures, but its chief rival Google reported more than $1 billion in the fourth quarter from such ads.)

In contrast, sales from Yahoo's subscriber fees, including a broadband deal with SBC Communications, reached $149 million for the first quarter. That was up 61 percent, compared with $93 million for the same period of 2004.

Mark Mahaney, a financial analyst at American Technology Research, said that the two areas of strength were paid search and fees revenue.

Mahaney pointed to Yahoo's reported traffic acquisition costs, or the roughly $355 million that Yahoo paid to its search partners in the first quarter, to gauge growth in the business. Those costs rose by roughly 21 percent quarter over quarter, compared with 17 percent sequential growth in the fourth quarter of 2004. "That's a pretty good indicator of paid search growth," he said.

"Yahoo's been saying for some time that it's a broad play" media business, Mahaney said, "and this is one of the quarters that reminds you how (true) that is."

Because of optimism for online ad growth, the company raised

its second-quarter outlook. Yahoo now expects to earn between $855 million and $895 million.

Yahoo CFO Sue Decker said that average pricing in the paid search business was subject to volatility, however. Analysts downgraded both Yahoo and Google earlier this year based on fears of a slowdown in paid search. Factors affecting pricing can include seasonality in ad spending and advertisers turning to a mix of new keyword inventory, as opposed to pushing prices higher on stock keywords.

Still, Semel said the company is best positioned to capitalize on brand advertising and growth in paid search. Yahoo hopes to expand the number of advertisers using paid search, as well as get a bigger commitment from those advertisers, he said. The CEO added that there is a "major increase" in demand for rich media advertising, such as video, by marketers taking advantage of broadband households. He called this an important trend toward brand advertising on the Internet.

Semel said that the next phase of Yahoo's growth will be driven by consumers' depth of usage of its network. Roughly 372 million people used Yahoo in the first three months of 2005, and 176 million were habitual users. The company has 8.9 million "paying relationships" with those visitors, up by more than 3 million year over year, he said.

For the quarter, Yahoo reported total revenue of nearly $1.2 billion, a 55 percent rise over the same period of 2004. It reported an operating income of $345 million, up 64 percent from $211 million in the comparable period of 2004.

In answer to questions about the threat of click fraud to the company's paid search revenue, Dan Rosensweig, Yahoo's chief operating officer, said it is something the company "takes seriously." But, to date, the commercial search arm at Yahoo has managed to contain it, he said.

Decker added, "We have a number of algorithms that filter this out."

Shares of rival Google, which is expected to report earnings Thursday, were up more than 4 percent to $199.60 in after-hours trading.