October 8, 2002 2:56 PM PDT

Can ads pull Yahoo out of a spot?

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When Web portal Yahoo reports its third-quarter fiscal earnings on Wednesday, all eyes will be searching for improvement in its online advertising business.

These are trying times for Yahoo, a former Wall Street darling whose fortunes crumbled during the dot-com bubble's implosion. Since early 2001, its online advertising revenue, once its lifeblood, has deteriorated and has yet to show signs of turning around.

In July, Yahoo reported its first earnings-per-share profit in six consecutive quarters, a significant milestone for CEO Terry Semel, who joined the company in May 2001. However, its marketing services revenue, which encompasses online advertising, declined 4 percent to $135.7 million. Taking away an estimated $20 million in revenue generated from an agreement with pay-for-placement search company Overture Services, Yahoo's online advertising business declined 19 percent from the previous year, according to brokerage house Merrill Lynch.

"I'm looking for an update on the company's core advertising business, hopefully excluding Overture, to get a real sense of the organic growth in the company's primary line of business," said Derek Brown, an analyst at WR Hambrecht. "So far, that has not been easy to come by."

Nevertheless, the financial hole left by advertising is gradually being refilled by Yahoo's diversification efforts. For about a year and a half, Yahoo has been charging fees for services such as e-mail forwarding, extra data storage, personals listings and interactive video games, to name a few. Last quarter, the company said it had signed up 1 million paid customers.

According to Reuters, Yahoo is expected to show revenue of $239.16 million, an increase of about 42 percent from last year's third quarter. Analysts surveyed by First Call are expecting the company to show a profit of 4 cents per share, excluding one-time charges, compared with a loss of a penny a share in the year-ago quarter.

In September, Yahoo launched its long-awaited DSL (digital subscriber line) service with SBC Communications. Called SBC Yahoo DSL, the service underscores Yahoo's efforts to tap nonadvertising revenue and to deepen its billing relationships with consumers. Yahoo executives expect the deal to add up to $30 million in revenue for the year, but analysts have questioned that figure because of the service's late start.

Yahoo last quarter also said that 40 percent of its revenue is derived from "fees and listings," encompassing premium services and revenue generated from HotJobs.com. The online job bank was acquired earlier this year to help boost Yahoo's nonadvertising revenue through the fees it charges companies to post online help-wanted notices.

Still, analysts are wary about HotJobs' contribution to Yahoo's health. Some analysts hope Yahoo can show growth outside of the Overture deal and the HotJobs acquisition. If indeed it can, it would be a good sign that the company has been able to turn around its fortunes without depending on outside deals and purchases.

But other analysts believe including the Overture deal in Yahoo's marketing services revenue is valid--and a testament to one way that Yahoo can make money out of its massive audience. Overture pays Yahoo each time people click on its sponsored search results.

"I'd include (Overture) in its organic growth because search is just another form of advertising," said Jeff Fieler, an analyst at Bear Stearns. "There's a big shift in how people spend online advertising away from banners and buttons and towards search and rich media."

Yahoo shares were up 43 cents, or 4.7 percent, to $9.50 at the close of Tuesday's trading.

Reuters contributed to this report.

 

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