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For Yahoo, Earnings to Yodel About

Google stole all the headlines last week with its new e-mail offering, but Yahoo! (YHOO) snatched back the Internet spotlight on Apr. 7 with blowout first-quarter earnings. The online giant hurtled past Wall Street expectations, notching $101 million in profits, more than double last year's first-quarter total. With $550 million in sales, Yahoo's numbers represent all-time bests for the 10-year-old portal, vaulting its shares 10% in after-hours trading, to $53.03.

Most stirring is the outlook for Internet advertising at Yahoo -- a market that accounts for three-quarters of its revenues. Chief Executive Terry S. Semel now predicts Yahoo's online-ad business could grow 35% this year, up from prior forecasts of 25% to 30%. That's far better than the industrywide rebound. Deutsche Bank Securities predicts that the overall market for online ads will grow 17%, to $8.4 billion, in 2004 -- just half the clip of Yahoo's projected bounce.

The success has Yahoo strutting. It has announced plans for a two-for-one stock split -- the first since February, 2000, when Yahoo's post-split shares traded at a stratospheric $166. Moreover, Yahoo upped its revenue guidance for 2004 by 13%, to nearly $2.4 billion. That's aided in part by its Mar. 26 acquisition of European comparison-shopping site Kelkoo, for which it shelled out $575 million.

LOTS TO PROVE. The glowing results, coupled with Yahoo's recent launch of its own search technology, could diminish concerns about its competitive position vs. Google. Still, the search giant's Mar. 31 announcement that it plans to get into the e-mail business pits it more directly against portals like Yahoo (see BW Online, 4/1/04, "Google Drops an E-Mail Bomb"). Google's new service, dubbed Gmail, is expected to be available for widespread testing in several weeks. It offers free e-mail accounts with 1 gigabyte of storage space -- 250-times bigger than Yahoo's current freebie account and 10-times larger than Yahoo's biggest premium account, for which it charges $60 per year.

Despite the massive disparity, Yahoo watchers aren't hitting the panic button. Sure, e-mail is a critical application that keeps visitors coming back to the site on a regular basis. Indeed, it's the second-most popular service among Yahoo's vast online offerings, according to researcher comScore Media Metrix. But Google has a lot to prove in the new business of e-mail, including basics like customer support and spam filtering -- where Yahoo sports a six-year record.

And Google's decision to include targeted ads alongside e-mail messages has already sparked controversy. "I don't think it's going to make a significant dent in Yahoo," says Martin Pyykkonen, senior analyst at Janco Partners. With Yahoo's 2004 price-earnings ratio nearly triple the rest of the Internet sector, investors can only hope he's right. By Ben Elgin in San Mateo, Calif.

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