Yahoo Hits New High-Water Mark, Stock Sinks Anyway

Yahoo (Nasdaq: YHOO) comfortably met Wall Street targets for the second quarter, posting its fifth straight profitable quarter and its best revenue mark ever as key areas, such as subscriptions and premium online services, provided a spark.

The company said it earned US$50.8 million on $321.4 million in revenue in the quarter ended June 30th, compared with a profit of $21.4 million on $225.8 million in revenue last year.

The Sunnyvale, California-based Web portal also boosted its outlook for the rest of 2003, stopping short of declaring a recovery ahead but pointing to some hopeful signs, particularly in the advertising and marketing segments of its increasingly diversified business model.

"Each piece of our engine is working smoothly with the others, and the numbers show that over the last 18 months, our performance has been stronger and better," CEO Terry Semel said.

Sum of the Parts

Semel noted that Yahoo saw "more balanced growth" in marketing , with traditional advertising growing along with sponsored searches, and more willingness among consumers to pay small monthly fees to receive premium services. Both marketing and services revenue grew more than 40 percent in the quarter.

Because of its position at the front of the first group of high-tech firms to report financial results, Yahoo's earnings release was closely watched. Analysts said that while the company was widely expected to meet expectations, its raised outlook could spell good news for those hoping the recent tech-stock rally can continue.

However, Yahoo may have fallen victim to high expectations: Its shares actually lost substantial ground in after-hours trading Wednesday. By mid-morning Thursday, the company's stock was trading down nearly $3 to $32.40.

Some analysts have raised flags about the recent run-up in tech stocks, with many recently recording 52-week highs, including eBay (Nasdaq: EBAY), which recently traded as high as $110.

Goldman Sachs analyst Anthony Noto said in a research note that Yahoo had left "little room for upward estimate revisions," suggesting that the stock was due to flatten out after nearly doubling in value in the past three months. In fact, Yahoo stock traded below $10 as recently as last fall.

Subscription Story

Yahoo said marketing services revenue grew 44 percent compared with 2002, driven by both targeted search and more traditional forms of online advertising. Fees revenue, which includes everything from subscription income to listings on the company's HotJobs.com career site, grew 43 percent.

Nielsen//NetRatings director and senior analyst Lisa Strand said Yahoo has gained as much as any portal from embracing paid search results. It was among the first to adopt new ways of generating revenue from what had long been a free service supported mainly by ineffective banner ads.

"Yahoo also had the most to gain because their original approach to organizing and categorizing the Web is less important now than it was," Strand told the E-Commerce Times. "They sort of bet that consumers would embrace and accept it, and they have certainly done so."

Yahoo also cited strong gains from its alliance with SBC, which has begun to market broadband access through Yahoo. The company's online personals business and services aimed at small businesses also grew, while Webcasting revenue decreased in the quarter.