July 9, 2003 5:25 PM PDT

Yahoo meets earnings expectations

Yahoo on Wednesday reported second-quarter earnings that met Wall Street analyst expectations but dampened their enthusiasm for proof of an advertising recovery.

The Web portal reported a profit of $50.8 million, or 8 cents a share, on $321.4 million in revenue for the quarter ending June 30. That compares with a profit of $21.4 million, or 3 cents a share, on $225.8 million in revenue during the same period last year.

Wall Street had expected the company's net income to reach 8 cents a share on revenue of $315 million, according to First Call.

Although Wall Street analysts commended Yahoo for showing another strong quarter, some raised warning flags over Yahoo's failure to meet the Street's standard of success by beating expectations.

As of 4 p.m. PT, shares of Yahoo slipped nearly 7 percent in after hours trading from their $35.29 close to $33, according to Island ECN.

"I think you get the gist of why the stock is down," said Frank Gristina, an equity analyst at Avondale Partners. "We didn't get as much upward guidance as we had hoped and we did not get enough of the metrics that we wanted."

Analysts were also deflated by what they expected to be stronger signs of a steady online advertising turnaround. In the past month, investors anticipated that a strong quarter from Yahoo would add indicate that that marketers were looking at the Internet as a must-buy medium. This quarter, however, did little to boost their hopes.

Yahoo's online advertising business grew 12 percent from last year and 9 percent from last quarter, according to Deutsche Banc Alex Brown equity analyst Jeetil Patel. But that's less than what analysts had expected.

"We're still waiting it out and seeing some improvement, but it's just a little slower than expected," Patel said. "Marketers still kicking tires, but we haven't seen any consistency in their spending yet."

Nevertheless, Yahoo also raised its financial expectations for 2003. The Sunnyvale, Calif.-based company now expects revenue to hit between $1.26 billion and $1.31 billion for the year, up from its previous estimate of between $1.14 billion and $1.21 billion.

The Web portal's operating income before depreciation and amortization--what was formerly known as earnings before interest, taxes, depreciation and amortization--totaled $97.3 million, compared with $35 million from last year. Cash flow, however, dropped to $92.1 million from $103 million in 2002.

The results mark the fifth consecutive quarter that Yahoo has posted a profit in earnings. The company has reaped financial benefits from its partnership with commercial search provider Overture Services, which pays Yahoo every time someone clicks on its sponsored search result on the Web portal. Yahoo also showed continued growth in its paid services and core online advertising revenue streams.

Meanwhile, Yahoo's three revenue lines each reported year-over-year and quarterly growth.

• Marketing services: Revenue hit $219.2 million, up from $135.7 million a year ago and $190 million last quarter. The revenue line reflected a strong increase in Yahoo's paid search deal with Overture and growth in its online advertising business.

• Fees: Revenue totaled $69.9 million, up 43 percent from last year and a slight increase from $63.7 million last quarter. Executives said Yahoo now has 3.5 million domestic paid relationships. The revenue line includes Yahoo's premium services businesses such as personals, small business services such as enhanced e-mail and its DSL (digital subscriber line) service with SBC Communications. However, Yahoo's event Webcasting business through its Enterprise Solutions unit showed a revenue decline.

• Listings: The business hit $32.3 million in revenue, up 29 percent from last year and a rise from $29.3 million last quarter. Yahoo attributed gains to its HotJobs online job listing business.

Although Yahoo executives touted last quarter's gains in all three businesses, they were resistant to break out specific performance metrics for their businesses. In particular, details were murky in the fees business, which highlights Yahoo's attempt to diversify away from advertising and develop paid relationships with its visitors.

Yahoo's fees business last quarter grew largely from the transition of SBC customers over to the co-branded DSL service, which offers Yahoo a cut of DSL subscription revenue. While most of these subscribers have migrated, Yahoo Chief Operating Officer Dan Rosensweig said the fees business will continue to thrive despite the drop-off of new migrations.

"What you saw in the second quarter in total net adds was predicated on new subscribers," Rosensweig said in an interview with CNET News.com. However, he declined to comment on how many new subscribers were added to the service in the second quarter.

Rosensweig added that future growth in access will be hinged on an upgrade of the SBC-Yahoo product later this summer, the launch of a similar partnership with British Telecommunications this fall, and the launch of its premium service package slated after the BT launch.

 

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