Yahoo! Beats Estimates, Sees Ad Market Stability - TheStreet

Updated from July 10



beat analysts' estimates for the second quarter, raised guidance for full-year financial results and forecast an ad sales rebound in the second half of the year.

But the Internet bellwether, which announced second-quarter financial results Wednesday evening, must still contend with analysts who say its deflated stock is still priced too high, given its limited prospects for growth.

Indeed, Merrill Lynch downgraded the shares Thursday morning, saying the company's fundamentals don't support its current price. The shares tumbled 46 cents to $11.73 in the Instinet premarket session following the move. Merrill said a more reasonable valuation for the shares is $9 to $10.

For the second quarter ended June 30, Yahoo! reported revenue of $225.8 million, at the high end of its guidance for the quarter and ahead of the Thomson Financial/First Call consensus of $215 million in revenue. The company reported revenue of $182.2 million in the second quarter of 2001.

Net income based on generally accepted accounting principles amounted to $21.4 million, or 3 cents a share, compared with the analysts' consensus of 2 cents per share and a year-ago net loss of $48.5 million, or 9 cents per share.

As Yahoo! Chairman and CEO Terry Semel noted on the company's conference call with analysts, the results represent Yahoo!'s first quarter of GAAP profitability since the third quarter of 2000.

The company's revenue -- 40% of which stems from fees, listings and transactions -- reflects ongoing efforts to diversify revenue beyond advertising sales, which fueled Yahoo!'s early growth but which fell 4% this quarter from the second quarter of 2001. Semel said on the call that Yahoo! had more than 1 million paying customers at the end of the second quarter, up from 600,000 at the end of the first quarter.

As Yahoo! already indicated, much of the revenue growth this year came from the HotJobs career site, which Yahoo! acquired earlier this year and which isn't included in the prior year's results. If HotJobs' revenue were excluded, according to Yahoo!, the company would have reported a revenue increase of 11% over the second quarter of 2001 rather than the 25% growth it recorded.

Despite the focus on new fee-based and subscription-based services, Yahoo! hasn't given up on advertising sales. On the call, Semel forecast double-digit year-over-year growth in marketing services in the second half of the year.

On the conference call, Chief Financial Officer Sue Decker characterized ad pricing as "stable," with particularly high demand in the categories of financial advertising and "sponsored search" -- pay-per-click search listings such as those provided by

Overture Services



That stabilization, said Decker, was a motivating factor in the company's decision to cut the amount of advertising inventory it sells on a "cost-per-action" basis -- ads priced relative to the business they generate for an advertiser rather than the size of the audience the advertiser reaches.

For the year, Yahoo! raised revenue guidance from a range of $870 million to $910 million to a range of $900 million to $940 million. Earnings before interest, taxes, depreciation and amortization -- a common bottom-line media industry yardstick -- is expected to range between $140 million and $165 million.

Yahoo!, which cut costs last year in response to the Internet economy's deflation, may have more belt tightening in store. The company, said Semel, "may streamline aspects of our network that no longer resonate with our users."

Meanwhile, though analysts are applauding Yahoo's progress, not all are smitten by the stock. On Wednesday morning, for example, Jim Preissler, director of digital media research at Investec, initiated coverage on Yahoo! with a sell rating and a price target of $8. "The former hero of the dot-com revolution, there remains a strong sentimental attachment to Yahoo! and its services," writes Preissler. "We believe investors will eventually have to come to the realization that there will be no 'quick fix' to Yahoo!'s revitalization."

Preissler says Yahoo!'s shares "look pricey based upon almost every comparable measure -- even if we assume aggressive growth assumptions going forward." Investec hasn't provided recent investment banking services to Yahoo!.