Yahoo: Lots of Ads, One Minus

Advertising revenues and fourth-quarter profits soared, making less-than-hoped-for growth in premium services the only disappointment

By Ben Elgin

Skeptics expecting the torrid Internet advertising market to cool off may be in for a long wait. Yahoo! silenced naysayers on Jan. 18, posting impressive fourth-quarter financial results largely based on the strength of its ad business.

Excluding hefty gains from unloading stock in key competitor Google (GOOG ), Yahoo's (YHOO ) net profits jumped 149% during the quarter, to $187 million.


  Revenues jumped 54%, to $785 million, factoring out fees Yahoo pays to partners for carrying its ads. It beat Wall Street expectations on both top and bottom lines. "It was a very strong quarter," says Mark Mahaney, analyst at American Technology Research.

For the year, Yahoo's profits jumped 121%, to $526 million, with sales climbing 77%, to $2.6 billion. The results could help buttress Yahoo's shares as its market valuation creeps past $51 billion. In after-hours trading, the stock was up 2%, to $38.

Blue-chip advertisers flocking to the Web have given Yahoo perhaps its biggest boost. It says an industry index of 100 large advertisers boosted their fourth-quarter ad purchases on Yahoo by 55% over the same quarter a year ago. The total was equivalent to the amount this group spent on Yahoo during the entire year of 2002, according to CEO Terry Semel.


  That jump is indicative of a broader ad-spending trend that Yahoo has been predicting for years. According to Yahoo and independent researchers, the Internet accounts for roughly 14% of media consumption, yet receives slightly more than 3% of ad spending. At some point, Yahoo and others have argued, ad dollars will have to follow the viewers. "Yahoo is the best-positioned Internet company to take advantage of this shift," says Semel.

This isn't just bravado, according to analysts. During the fourth quarter, Yahoo's display ads -- popular among mainstream advertisers seeking to build their brands online -- grew faster than its text-only search ads, according to American Technology Research. "There's some merit to this," says Mahaney.

Beyond the ad business, Yahoo has made some headway in its efforts to attract paying customers. With an array of subscription services, from fantasy-sports tools to online personals to Internet-access bundles, Yahoo has notched 8.4 million paying subscribers. That's a 71% boost over last year's yearend total.


  Despite these totals and a new access partnership with Verizon (VZ ) announced on Jan. 17, Yahoo's premium business has trailed its ad growth. Although not a significant red flag, the disparity has hobbled Semel's long-term goal of diversifying Yahoo's revenue streams. Shortly after taking over in 2001, he said he wanted to generate 50% of Yahoo's revenues from sources other than advertising. Instead, Yahoo's ad business has climbed from two-thirds of its total in 2002 to nearly 80% today.

Still, that's hardly a deterrent for investors. After all, Yahoo's ad business is much healthier than it was before the bubble burst. And with Semel's track record to date, few are betting that Yahoo will stumble anytime soon.

Elgin is a correspondent in BusinessWeek's Silicon Valley bureau

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