October 6, 2003 2:04 PM PDT

Yahoo earnings hinging on search, advertising

As Yahoo prepares for its third-quarter earnings report, set for Wednesday, analysts are expecting the Web portal to continue its streak of solid growth from many of its marquee businesses.

Wall Street analysts see Yahoo reporting earnings of nine cents a share and revenue of $335.7 million for the quarter ended Sept. 30, according to First Call consensus estimates. If Yahoo meets these expectations, it will be the company's sixth consecutive quarter of profitability.

Yahoo's performance will hinge on its lucrative agreement with commercial search company Overture Services, as well as on whether Yahoo can show online advertising growth, analysts said. The company may be able to deliver on the advertising side, despite the third quarter's reputation as the slowest period of the year.

"We are expecting the company to report a fairly strong quarter," said Derek Brown, an equity analyst at Pacific Growth Equities. "My data points suggest that the online advertising market continued to perform well through summer. It's not quite the seasonal slowdown that people expected."

Online advertising has been a sticky issue for Yahoo and the investment community. In July, despite reporting profit and continued revenue growth, Yahoo reported earnings that only met expectations. Many analysts criticized Yahoo for reporting online advertising revenue that came in below expectations. Investors sent the stock down 7 percent in after-hours trading that day.

What continued to grow was Yahoo's relationship with Overture Services, a company it plans to acquire for $1.63 billion in cash and stock, pending regulatory approval. Overture has helped Yahoo return to profitability by tying its business into Yahoo's search results. Every time a Yahoo user clicks an Overture sponsored link in the Web portal's search results page, Overture pays Yahoo a cut of the fees it receives from the advertiser.

Youssef Squali, an analyst at First Albany, expects Yahoo's total search revenue to jump 140 percent from last year to 90 million this quarter. He also expects advertising to increase 12 percent from last year.

"I think it's going to be a good quarter, driven by very strong growth in search," Squali said.

Overture accounted for 20 percent of Yahoo's revenue last quarter.

Search has become a companywide priority for Yahoo because of its revenue potential and the company's growing competition against search leader Google. Yahoo has begun offering a peek of its new algorithmic search results, built from its acquisition of search technology company Inktomi. Google currently powers most of Yahoo's algorithmic search results, but the partnership is expected to dissolve after Yahoo completes its implementation of its new search technologies.

Aside from advertising, paid services will also be in the line of sight when Yahoo reports earnings. The company has made subscription-based services, such as personals and enhanced e-mail, a priority since online advertising took a nosedive in 2001. Yahoo last quarter reported 3.5 million paid customers, and is expected to reach 4 million this quarter, according to First Albany's Squali.

 

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