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Yahoo! Revenue Soars on Search, Ads

Yahoo! Wednesday reported soaring revenue and earnings in line with expectations for the fourth quarter, with its search and marketplace properties getting the credit along with the overall recovery of interactive advertising and the acquisition of Overture.

"Two years ago we had no sponsored search listings. Today they account for 60 percent of our revenues, after subtracting TAC [traffic acquisition costs]," said Sue Decker, the Sunnyvale, Calif.-based company's CFO.

In the wake of the giant search portal's report of $664 million in revenue, representing 132 percent growth over last year and its most successful quarter in its 10-year history, an analyst expects the company to sustain its revenue numbers at that level.

"I believe they will be able to keep up at this pace," said Kevin Calabrese, a securities analyst at Argus, because "they're a much larger company now. They've grown 50 percent since last year - the company had 5,493 employees at the end of this quarter and 3,571 at the same time last year.

The giant Web portal had fourth-quarter earnings of $75 million, or 11 cents a share, compared with earnings of $46.2 million, or 8 cents a share, in the fourth quarter of 2002. Revenue shot up to $663.9 million from $285.8 million in the same quarter of the previous year. The company also reported numbers for the full year 2003. Revenues came in at $1.63 billion and net income was $328 million, or $0.37 per share.

Revenues exceeded analysts' expectations and earnings hit their marks. A poll by Thomson/First Call reported a consensus of expectations for net profits of 11 cents a share on revenue of $495.5 million for the fourth quarter of 2003, excluding certain items.

Marketing services revenue, which includes both search and display advertising, was the key driver of growth, totaling $545.5 million for the fourth quarter of 2003, a 178 percent increase from the $196.4 million reported in the same period of 2002.

Yahoo! CEO Terry Semel refused to break out of the growth rate for branded advertising, saying only, "Both of our advertising lines, branded and sponsored search, have been gaining quite well on a global basis."

Non-marketing elements of the business that aided its growth included fee-based services such as Yahoo! Personals and e-mail. Revenue from fee-based services was $85.2 million in the fourth quarter.

Semel predicted 25 to 30 percent growth for the company overall in 2004. He said the company would bring in between $475 million and $505 million in the first quarter, with full year 2004 revenues coming in between $2.12 billion and $2.25 billion.

The CEO said Yahoo! will continue to emphasize offering marketing services to a wide range of clients -- small and medium sized businesses as well as blue-chip advertisers.

Semel also affirmed that Yahoo! will be using its own algorithmic search process in the first quarter of 2004. "You'll see a much faster and more aggressive search program this year as we utilize algorithmic processes," he said. Sources in the industry say Yahoo! has indicated it will drop Google's search technology later this quarter, though the company itself had been mum about the change.

"Yahoo will drop Google's search technology this quarter. That was the point of a couple of its acquisitions, so they wouldn't have to farm out the algorithmic search any more. They're been preparing to replace Google's services for a year now," Calabrese said. Overall, Yahoo attributed the revenue growth to the acquisition of Overture in the fourth quarter of 2003, strength in its search and marketplace properties and the overall trend toward improvement in the online advertising marketplace.

"Yahoo's results reinforce the notion of a recovery for interactive advertising going into 2004. That's pretty clear from the revenue numbers," Calabrese said.

"I think it's great news for the Net in general and us as well: we were able to continue doing business with almost the entire list [of top advertisers] from 2002 to 2003," said Semel. "We see this as a trend: many customers put their toe in the water, then their feet, now it's heading toward their knees."