Can Yahoo! Make the Bounce Last?

Maybe, if new broadband and Net search efforts succeed

No question, Terry S. Semel has engineered a remarkable turnaround at Yahoo! Inc. (YHOO )--especially given the problems at rival America Online Inc. (AOL ) In the past year, Chairman and CEO Semel has led Yahoo back into the black, following a $93 million loss in 2001. Now, he's predicting that in 2003, the Internet giant will best its previous records in annual sales and profits--both set in 2000, at the height of the tech boom.

He's got plenty of work ahead. With Yahoo's stock still down about 20% since Semel took the helm in 2001, the 59-year-old exec must convince the market that he has built a long-term growth engine that will justify Yahoo's $10.6 billion market valuation. Semel will get his chance on Feb. 12, when he presents his strategy in crucial new markets, particularly forays into broadband access and the Internet search market.

On the surface, Yahoo has momentum. It reported earnings of $43 million last year, reversing the 2001 loss, as revenues grew 33%, to $953 million. The revenue growth came largely through its 2002 acquisition of careers site and a partnership with Overture Services to sell ads on Yahoo's search-results pages. And the core Internet-ad business, responsible for 60% of revenues, appears to be picking up. Semel now predicts 20% growth in such revenues for this year.

But Semel can hardly kick back and relax. Yahoo's stock price of $17.75 means it trades at a lofty 63 times expected 2003 earnings. That's too pricey for analysts concerned about Yahoo's ability to generate strong growth in its newer businesses. Says First Albany Corp. analyst Youssef Squali: "Yahoo is in a transition period."

Bulking up the broadband business, with its stable monthly-subscriber fees, is Semel's most important task. True, Yahoo's five-month-old partnership with SBC Communications Inc. (SBC ) to sell broadband access is by most accounts a success. The business garnered Yahoo at least $7 million in sales in the fourth quarter, with an additional $70 million expected in 2003, according to analysts.

But the SBC deal by itself won't wow the market. With Yahoo capable of reaching only one-third of the country through its SBC alliance, Yahoo needs to find a way to reach the rest. To that end, BusinessWeek has learned, Yahoo will soon roll out a "bring-your-own-broadband" service. Subscribers will pay a monthly fee to use a souped-up Yahoo gateway, regardless of what broadband provider they use. Yahoo will likely sell its service for about $5 a month, compared with $9.95 and $14.95 for Microsoft Corp.'s (MSFT ) MSN and AOL, respectively.

Yahoo declined to comment on its new broadband initiative, but the portal will surely rely on blitz marketing and the low price to win customers. Yahoo may also need to bolster its premium content and services. Fewer than 1% of Yahoo's visitors pay for services such as jumbo-size e-mail accounts or Yahoo's personal-ad listings. With even loyal Yahoo users reluctant to shell out for extras, it may be harder to convince non-Yahoo users, who already frequent other portals.

Yahoo also must prove it can compete in the Internet search market, where it ranks No. 3 behind MSN and Google. Last year, revenues from ads on its search-results pages boomed from next to nothing to over $100 million. Now, Yahoo is tinkering with its search pages to squeeze in more ads. For that to matter, Yahoo must solidify its standing as a premier search destination. The portal has long used search technology from other providers, such as Inktomi Corp. (INKT ) and Google. But with Google emerging as a serious rival, Yahoo is acquiring Inktomi for $235 million and is soon expected to evict Google as its search-technology source.

To succeed, Yahoo will have to grab market share back from Google. The popular site snared 4% more search traffic than Yahoo in December, according to comScore Media Metrix. Proving that Inktomi's search technology can rival Google's could be more a branding challenge than a technological one. Analysts say the difference between search engines isn't great these days and that Inktomi is greatly improved.

It's another bright opportunity for Yahoo. Now it's up to Semel to prove he can deliver on the potential.

By Ben Elgin in San Mateo, Calif.

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