July 11, 2002 3:20 PM PDT

Yahoo earnings back in black

Yahoo shares rose slightly Thursday, a day after the company reported its first profit in six quarters but found it difficult to assuage analysts' concerns about its core advertising business.

The Web portal on Wednesday reported net income of $21.4 million, or 3 cents a share, on sales of $225.8 million. That's compared with a net loss of $48.5 million and revenue of $182.2 million for the same period in 2001.

The company recorded $36.1 million in earnings before interest, taxes, depreciation and amortization (EBITDA)--one of the most closely watched measures of the financial performance of media companies. That's in contrast to an EBITDA loss of $38 million last year.

The company also raised its revenue and earnings estimates for the rest of the year amid predictions of strong advertising sales growth.

Many analysts applauded Yahoo's quarter Thursday, but shares slipped in early trading after Merrill Lynch gave the stock a "sell" rating. They later climbed 73 cents, or about 6 percent, to close at $12.92 on the Nasdaq Stock Market. Despite raising financial expectations, Yahoo shares are pricey and the health of its core advertising business remains questionable, said Merrill analyst Justin Baldauf.

Baldauf attributed Yahoo's stable advertising revenue to its deal with Overture Services, which contributed more than an estimated $20 million for the quarter. Taking away Overture, Yahoo's core advertising revenue declined 19 percent from last year, according to Baldauf. Overture and Yahoo share revenue from providing "pay-for-performance" searches, through which advertisers pay to get their sites listed in search results.

Yahoo recorded $135.7 million in marketing services revenue, which largely consists of online advertising dollars. That's a 4 percent decrease from the same period in 2001, mostly because of a drop in advertising contract renewals, according to the company.

However, Chief Executive Terry Semel emphasized that Yahoo expects to show growth in this division in the coming quarters.

"We feel confident we will achieve double-digit year-over-year growth in marketing services during the second half of this year," Semel said in a conference call Wednesday, adding that advertising in certain areas is growing despite overall declines.

For the current quarter, transactions posted a 179 percent revenue increase from 2001, driven by online purchases on Yahoo's shopping sites and the recouping of performance-based fees from partners.

The company's fees and listings business, its third business line that includes its expanding pool of paid premium services, jumped 109 percent from last year to $74.1 million. The increase was attributed to Yahoo's acquisition of online job-listing site HotJobs last quarter, the rise in premium services subscribers and its growing online personals business.

Fees and listings accounted for 40 percent of total revenue, according to Yahoo. The company said it ended the second quarter with more than 1 million paying customers, up from 600,000 in the first quarter.

Excluding the contribution of HotJobs, listings revenues rose 19 percent from the first quarter, according to Yahoo Chief Financial Officer Susan Decker.

Looking forward, Yahoo raised its 2002 annual revenue estimate to between $900 million and $940 million; it now expects third-quarter revenue to come in between $225 million and $250 million.

Yahoo also raised its 2002 EBITDA estimates to between $140 million and $165 million; EBITDA estimates for the next quarter are between $38 million and $48 million.

Next quarter, capital expenses are expected to come in between $10 million and $15 million. They are likely to reach between $40 million and $50 million for 2002. Depreciation will range between $22 million and $24 million next quarter and $85 million and $90 million for 2002.

Yahoo also said it extended a deal to carry Google's search listings as a backup for its own search directory until September.

Decker said in an interview that the quarter offered solid proof that Yahoo had unwound itself from its many dot-com advertising deals. She added that traction in the premium services businesses was significant, given that it barely existed a year ago.

"This is a symbolic quarter," she said.

Still, analysts for now are unwilling to call it a recovery. Despite bullish revenue projections for the coming year, the Internet remains unproven territory for advertisers, they said.

"It's too soon," Jeetil Patel, an analyst at Deutsche Banc Alex Brown, said in reference to an Internet recovery. "There are still lots of questions around formats and pricing and whether (the Web) is a direct marketing or branding vehicle."

 

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