Yahoo! Giving Web Ad Market a Shout

Yahoo! forecasts operating income before depreciation and amortization to be in the range of $94 million to $104 million. Weisel and U.S. Bancorp Piper Jaffray are forecasting EBITDA -- essentially, what the Securities and Exchange Commission calls OIBDA -- to be $103.5 million, while SoundView Technology is expecting $114 million (off revenue of $352 million).

Full-year estimates are trickier because of the Overture acquisition. Analysts currently expect 2003 revenue of $1.31 billion, growing to $1.6 billion in 2004. Yahoo! is guiding for 2003 OIBDA of $375 million to $400 million.

But those numbers don't take into account the Overture acquisition. An Overture-fattened Yahoo!, says Weisel's Hodge, should have $1.54 billion in revenue and $418 million in EBITDA in 2003. That should rise to 2004 revenue of $2.65 billion and EBITDA of $635 million. (First Albany estimates 2004 revenue of $2.5 billion and EBITDA of $750 million.)

Purple Haze

Investors will also have to be prepared for the likely confusion that will occur when Yahoo! announces the Overture-fortified guidance, says SoundView Technology's Jordan Rohan. That's because Overture currently reports as gross revenue all the money it collects in its paid search business, then nets out as "traffic acquisition cost" the 64% or so of revenue it pays to Web sites for the privilege of selling advertisements on their sites.

But after the acquisition, Yahoo! will report the revenue paid by Overture to the parent company on a net basis. That, says Rohan, will likely result in a "one-time step-down" of as much as $300 million in 2004 revenue and costs -- at least in comparison with a simple Yahoo!-plus-Overture projection.

In raising his price target for Yahoo! to $45, Hodge says he believes the company can deliver 50% annual earnings growth over the next five years, even though Microsoft (MSFT Quote), which together with Yahoo! drives a majority of Overture's current revenue, is likely to develop its own paid search business rather than continue to patronize an Overture owned by its rival. Indeed, on Monday, the Redmond, Wash., software giant set off a massive hemorrhage in Overture rival LookSmart (LOOK Quote) by failing to renew their licensing arrangement. Given the time it will take for Microsoft to get its own pay-per-click advertising up and running, though, Hodge estimates Microsoft will stay with Overture at least through 2004.