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Yahoo! Noise Gets Louder

Investors feel certain they'll see a blowout fourth-quarter report after Tuesday's close.

The optimism surrounding Yahoo! (YHOO) is infectious, for better or worse.

Anecdotal indications of a banner fourth quarter in the Internet ad business are pouring in by the bucketful. Analysts are near-unanimous in hinting that there could be modest upside to their estimates when Yahoo! announces fourth-quarter results after the market's close Tuesday.

The situation feels like a strange throwback to the days of the dot-com bubble, in which everyone knew it wasn't the published estimates that mattered, but the elusive "whisper number."

And while that might mean large-cap Internet investors are being lulled into a dream from which they will eventually, inevitably, be harshly awoken, it also means that Wall Street is already looking toward the end of the year. Fans eagerly await whatever fiscal guidance and color commentary Yahoo! management has for the year that lies ahead.

Yahoo! shares, which traded as low as $20.57 last March and went as high as $39.79 in December, rose 79 cents Friday to $36.12.

For the record, analysts surveyed by Thomson First Call are expecting revenue of $754 million, up from $511 million one year earlier. Those numbers, one should note, are net revenue numbers that exclude traffic acquisition costs for Yahoo!'s Overture Services unit -- that is, the money that Overture collects from advertisers but pays to third-party Internet publishers for the privilege of running Overture's ads on their sites.

Operating income before depreciation and amortization -- the cash flow measure abbreviated as OIBDA and previously known as EBITDA -- is slated to come in at $308 million, analysts say. The consensus for earnings per share is 11 cents.

Certainly, indications are good for both the online advertising sector and for Yahoo!'s position in it. As Credit Suisse First Boston analyst Heath Terry reported in a note last week, the paid search business in which Yahoo! competes head to head with



enjoyed, by various reports, growth in both search volume and pricing in the fourth quarter. (Terry has an outperform rating and a price target of $45 on Yahoo!; his firm has done recent banking for the company.)

Furthermore, Yahoo!'s share of both searchers and searches remained relatively flat. That steadiness indicates no erosion from Google.

Branded advertising -- the pictorial ads not linked to search queries, and a category in which Yahoo! is not competing against Google at this time -- is expected to be strong as well.

UBS analyst Ben Schachter reports strong demand for both branded advertising and search keyword advertising in the quarter. Scarcity of inventory enabled price increases for branded advertising, he says. Additionally, Schachter says he believes Yahoo! did well internationally and could benefit from the weak dollar. (Schachter has a neutral rating on Yahoo! and a price target of $37.)

Schachter says he expects Yahoo! in 2005 will focus on content and distribution deals, leading to a "significant" increase in video and audio content available via Yahoo!. (The company recently hired Lloyd Braun, formerly of



ABC, to head Yahoo!'s media and entertainment division.

That prompts a measure of caution from Schachter. "Our concern with the 'living room' strategy is that the technology may still be slightly ahead of the reality," he writes. "While we are looking forward to the Internet migration to flat-screen televisions in the living room, we believe it may take more time than expected for that vision to move beyond the early adopters."

Meanwhile, Janco Partners analyst Martin Pyykkonen writes that the biggest risk facing Yahoo! is whether unit price increases for both branded advertising and paid search can be sustained, "especially as advertisers of all sizes become more adept at measuring the

return on investment of their ad campaigns." (Pyykkonen has a buy rating on Yahoo! and a price target of $43.)

As for the full-year 2005 outlook that analysts expect from Yahoo!, the mean revenue forecast is $3.38 billion, the OIBDA expectation is $1.39 billion and the EPS target is 50 cents.