Updated from April 7

Yahoo! ( YHOO) gave its growing legion of fans lots to cheer about Wednesday afternoon.

Kicking off the pivotal first-quarter earnings season for the Internet sector, the Sunnyvale, Calif., media giant posted stronger-than-expected numbers. It also laid plans for a 2-for-1 stock split and boosted 2004 guidance.

The news sent the stock surging 10% in wild postclose action, and the party continued Thursday morning. The shares were recently up $6.30, or 13%, to $54.65 on the Instinet premarket session. Although analysts have been saying that Yahoo! is benefiting from the postbubble recovery of the Internet advertising market, they clearly underestimated the extent to which Yahoo! has been cleaning up.

"Everything that we have achieved is the result of a very deliberate and focused strategy," CEO Terry Semel said on the company's Wednesday conference call.

Semel said that the organic growth rate of the company's marketing-services revenue could approach 35% this year, up from the company's prior forecast in the range of 25% to 30% growth. Thus, he said, the company is "gaining share in an industry which is also gaining traction."

Ahead of the news on Wednesday, Yahoo! fell 42 cents to $48.35, leaving it just shy of its 52-week high. CSFB raised its price target to $65 from $57 Thursday morning, while Goldman upped its target to $60 from $55.

Robust Numbers

For its first quarter ended March 31, Yahoo! posted earnings of $101 million, or 14 cents a share, on net revenue of $550 million. That's up from the year-ago $47 million, or 8 cents a share, on revenue of $283 million. A penny of the latest quarter's EPS figure comes from a one-time gain on unredeemed third-party loyalty program points that expired during the quarter.

Analysts had expected a first-quarter profit of 11 cents a share on net revenue just north of $500 million. Net revenue excludes traffic acquisition costs the company's Overture Services unit pays other Web sites.

Operating income before depreciation and amortization amounted to $211 million, comfortably ahead of the $161 million consensus.

"Yahoo!'s performance surpassed even our high expectations, delivering the most successful quarter in the Company's history," said Semel. "With our products more popular than ever before, we have experienced success across our entire business, including strong growth in our fee-based and marketing services."


The strong quarterly numbers were accompanied by a 2-for-1 stock split, always popular with tech-stock fans, and a boost to 2004 guidance.

"Our growth is a result of very impressive performance from our ongoing operations, leveraged further by recent acquisitions," said financial chief Susan Decker. "Looking forward, we are focused on making the appropriate investments and capital allocation decisions to help ensure sustainable, long-term growth. Due to our increased optimism about our business, we have raised our financial outlook for the full year 2004."

Decker said the company was raising estimates based on "better-than-expected results." The company's revised 2004 revenue estimate reflects 34% organic revenue growth, she said.

Indeed, the company raised its financial forecasts for the year, based in part on its recent acquisition of European comparison shopping firm Kelkoo.

Yahoo! said 2004 guidance is for net revenue of $2.41 billion to $2.52 billion, up from the January's forecast of $2.12 billion to $2.25 billion. The company projected annual operating income excluding depreciation and amortization of $890 million to $970 million, up from the prior range of $710 million to $800 million.

Second-quarter guidance is for net revenue in the range of $580 million to $615 million. Analysts have been expecting $534 million in revenue, though it's unclear how many of those estimates include Kelkoo's results. Operating income before depreciation and amortization, says Yahoo!, will come in between $210 million and $235 million, compared with the consensus of $180 million.

Answering the Call

Ratings action over the past few weeks shows Yahoo! has Wall Street's blessing as the beneficiary of a rising tide in online advertising. The gains come even as the company faces rising competition from the likes of closely held Google.

Analysts' reports going into Wednesday's earnings call indicate that Yahoo! -- whose stock has more than doubled over the past year and trades at more than 90 times estimated 2004 earnings -- still hasn't worn out its welcome on the sell side.

Typical of the warm feelings toward Yahoo! on the Street is a report issued last week by American Technology Research's Mark Mahaney, who initiated Yahoo! with a buy rating and a $64 price target. Citing a bullish outlook for Internet advertising, among other factors, Mahaney called Yahoo! his top buy recommendation among large-cap Internet companies -- for investors with a 12-month time horizon. (Mahaney's firm has no banking relationship with Yahoo!.)

One of the key factors driving Yahoo! is the growth of Internet advertising, writes Mahaney. He forecasts overall growth in 2004 U.S. Internet advertising of 30%, up from 20% growth in 2002, though behind the fourth-quarter 2003 year-over-year growth rate of 38%.

For the latest quarter, the company's marketing services revenue, excluding traffic acquisition costs, amounted to $427.8 million, according to TheStreet.com's calculations. ATR's Mahaney, for one, had forecast marketing services revenue of $390.9 million.

The company's operating margins, excluding TAC, amounted to 24% for the latest quarter, up from 19.4% one year ago.