April 9, 2003 2:16 PM PDT

Yahoo beats expectations, raises outlook

Yahoo reported on Wednesday better-than-expected earnings for the first quarter due to improved ad revenue. The company also raised its outlook for the year.

The Web portal reported a profit of $46.7 million, or 8 cents a share, on revenue of $282.9 million for the quarter ending March 31. That compares with a net loss of $53.6 million, or 9 cents a share, on sales of $192.7 million during the same period last year.

Wall Street analysts expected Yahoo to report a profit of 6 cents a share on $273 million in revenue.

Earnings before interest, taxes, depreciation and amortization (EBITDA) reached $84.1 million, up from $18.8 million in the same quarter last year.

The results mark Yahoo's fourth consecutive quarter of profitability and its second consecutive quarter of growth in its advertising revenue. The performance lends legitimacy to executives' claims that the past year has been a turnaround for the Web giant, which suffered a revenue collapse in 2001.

"I think it's beyond a turnaround at this point. They're now growing margins again," said Safa Rashtchy, an analyst at U.S. Bancorp Piper Jaffray.

In an interview with CNET News.com, Yahoo CEO Terry Semel said that during the coming year, the company will focus more on innovation and on improving product quality.

"This year, the overall strategy is to make all of our stuff better," Semel said. "If our content--and the quality of our content--is the best on the Net, people are going to spend more time with us."

Over the past few quarters, Yahoo has benefited from lucrative payments from Overture Services, which pays a fee every time someone clicks on search links hosted on Yahoo. In addition to those gains, analysts said Yahoo's advertising and subscription businesses also did well in the first quarter. These factors helped the company lift its financial outlook again.

Yahoo raised its revenue expectations for the second quarter to between $295 million and $315 million and its full-year outlook to between $1.14 billion and $1.21 billion. The raised outlook is due to solid execution across its businesses as well as to expected contributions from its recent acquisition of search provider Inktomi, the company said. The Web portal expects 2003 EBITDA to be in the range of $350 million to $380 million.

Yahoo said its free cash flow for 2003 should be between $295 million and $325 million.

Sifting the numbers
Yahoo broke down the results for its three revenue lines: marketing services, fees and listings.

Marketing services, which encompasses online advertising and the paid search deal with Overture, jumped 38 percent year over year to $190 million. Executives said this revenue line got a boost from Overture and from traditional advertisers.

Semel said during a conference call that excluding payments from Overture, marketing services revenue increased by a "double-digit percentage" over the same period last year.

The Web company's revenue from fees rose 61 percent to $63.7 million. The numbers include Yahoo's co-branded digital subscriber line (DSL) business with SBC Communications, as well as its online personals and e-mail storage.

Paid subscribers increased to 2.9 million from 2.2 million in the last quarter, according to Yahoo. About 245,000 to 280,000 of the net subscriber gains came from SBC DSL subscribers switching to the SBC Yahoo co-branded service, Yahoo Chief Financial Officer Susan Decker said during the conference call. (The Web company gets a cut of the monthly bill of DSL users who migrate.) However, Decker added that the number of migrations should trail off by the end of the second quarter.

One sore spot in the revenue from fees was Yahoo's enterprise services business, which reported a loss of $6 million to $7 million in revenue due to the de-emphasis of its event-based Webcasting service and the sale of other businesses.

Yahoo's listing revenue, which encompasses online job-listing subsidiary HotJobs, accounted for $29.3 million in revenue--an 89 percent increase from last year.

The company is expected to continue its upward growth as it heals itself from the bloodletting during 2001. Whether Wednesday's earnings signal an industrywide comeback for online advertising remains to be seen, as Yahoo has been forced to rethink its approach to advertising much earlier than many others in the market.

"I think the story now is how (online ad revenue) grows for its core marketing services," said Jeffrey Fieler, an analyst at Bear Stearns.

 

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