April 7, 2004 1:51 PM PDT

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Bolstered by improved online advertising revenue and continued momentum in paid search, Yahoo on Wednesday reported first-quarter earnings that blew away Wall Street expectations.

Yahoo's board of directors also approved a 2-for-1 stock split, payable beginning May 11. Yahoo hasn't split its stock since January 2000, during the height of the dot-com bubble.

The Internet bellwether said profit for the three months ended March 31 reached $101 million, or 14 cents per diluted share, on $550 million in revenue, excluding traffic acquisition costs (TAC). That's up from a profit of $46.7 million, or 8 cents a share, and sales of $282.9 million reported over the same period last year.

Wall Street analysts had expected the company to report a profit of 11 cents a share on $497.9 million in revenue excluding TAC, according to consensus estimates from Thomson First Call.

Yahoo focuses on revenue without TAC because it considers that figure a more accurate reflection of its business. TAC is the amount of money Yahoo subsidiary Overture Services pays its distribution partners, such as Microsoft's MSN, to host its commercial search results. Overture charges advertisers a price every time someone clicks on the link, and then gives its distribution partners a cut of the revenue, represented as TAC.

Revenue including TAC reached $758 million for the quarter.

Operating income before depreciation and amortization--formerly known as earnings before interest, taxes, depreciation and amortization (EBITDA)--reached $211 million, compared with $85 million for the same period last year. Cash flow jumped to $236 million from $99 million, while free cash flow surged to $197 million from last year's $78 million.

"Yahoo's performance surpassed even our high expectations, delivering the most successful quarter in the company's history," Yahoo CEO Terry Semel said in a statement.

Here's how the company's three revenue areas fared. All revenue amounts are part of Yahoo's $758 million this quarter, which includes TAC:

• Marketing services: Yahoo's biggest revenue generator--composed of its branded advertising and paid search businesses--reported $635 million in revenue, $10 million stemming from a one-time gain from the expiration of a third-party loyalty program. That's up from $545 million from the fourth quarter. Executives maintained that online advertising, both branded and search, will grow between 30 percent and 35 percent in 2004. That's less than the 40 percent in 2003, but greater than the overall Internet industry's growth.

"Our general belief is there is increased acceptance of the medium overall by advertisers, and we think our results reflect an ability to gain share even against increased opportunities," Yahoo's Chief Operating Officer Dan Rosensweig said in an interview. "The whole category is growing and we're growing faster than the category."

• Fees: Fees: Revenue from Yahoo's paid services businesses, such as broadband access, online personals and fantasy sports, increased only 3 percent from last quarter, but 39 percent from last year, to $88 million. Yahoo gained 900,000 subscribers from last quarter to finish the first quarter with 5.8 million paid users, bolstered by better-than-expected gains in its BT deal in Great Britain. Still, Semel said the company's online personals business reported its most successful subscriber gains this quarter.

• Listings: The business that largely consists of online job site HotJobs continued to struggle. While revenue increased to $34 million from $33.2 million last quarter, the gains were associated with the vague category "search and marketplace listings." Rosensweig said the job market continues to be weak, but he said "key vital signs" such as more listings and increasing renewal rates were encouraging.

At the end of the quarter, Yahoo had $2.79 billion in cash, cash equivalents and investments.

 

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