Biz News--The Post: "Yahoo Seeks to Reassure Investors"
washingtonpost.com
>>>By Ariana Eunjung Cha
Washington Post Staff Writer
Wednesday, July 12, 2000 ; E01
A team of upbeat Yahoo Inc. executives reported yesterday that second-quarter earnings beat expectations and revenue doubled from the same period last year, as they attempted to reassure nervous investors that the collapse of smaller dot-coms won't affect the Internet giant.
Shares of Yahoo have fallen for the past few weeks after two prominent analysts downgraded the stock over concerns about the growth of its advertising revenue. Many cash-strapped Internet upstarts had been renegotiating or canceling their ad deals with portals such as Yahoo in recent months, causing rates to drop and prompting worries that would affect the online gateway's bottom line.
Yahoo chief financial officer Susan Decker said advertising revenue had increased sharply. Decker declined to break down the amount of revenue streaming in from brick-and-mortar advertisers – which are viewed as more stable sources of income – vs. dot-com clients, saying only that Yahoo's "exposure to financially questionable clients is less than 10 percent of revenue."
Yahoo said earnings were $65.5 million, or 11 cents a share, including an acquisition-related charge, compared with the analysts' consensus estimate of 10 cents a share. Revenue rose to $270.1 million, compared with $128.5 million in the same quarter last year.
The stock jumped back nearly 10 percent in after-hours trading on yesterday's news.
In an interview following the conference call with analysts, chief executive Tim Koogle said he is optimistic about the company's focus on Web advertising and added that Yahoo should be unaffected by the problems of its smaller Internet companies.
"A natural part of the evolution of any part of a large industry is some consolidation . . . And the strong do get stronger during periods of consolidation," he said, pointing out that Yahoo is the most popular destination on the Internet.
Chase H&Q analyst Paul Noglows said, however, that the new report left him with mixed feelings about Yahoo's future. "Longer term, I think there are still questions and issues about whether Yahoo is effectively using its Internet influence in light of the AOL-Time Warner merger," he said, "But we thought this quarter was a significant outperformance and sends a message to the overall market about Internet advertising that things may be better than people thought."
The tenor of questions during the analysts' conference call reflected that uncertainty. Even for a company whose stock fluctuates so wildly that some day traders have made a living off buying and selling it exclusively, some industry watchers say the recent dips make it clear that Yahoo is at a critical juncture.
Deutsche Banc Alex. Brown analyst Andrea Rice Williams, who downgraded the stock Friday, said in a phone interview from Europe yesterday that the company is no longer viewed as a child with a lot of potential but as a "mature" adult with responsibilities that will be valued more like brick-and-mortar companies.
"Investors will look at earnings and pay a multiple on those earnings. And it's not going to be 200 times its revenue like it was this year," Rice Williams said.
Many investors have directed similar sentiments at the entire Internet industry, driving shares of several dot-coms below the $1 mark and out of business. Even the stock of two other Internet titans – online superstore Amazon.com and auctioneer eBay Inc. – have been beaten up in recent weeks.
There is a sense among some industry analysts that pure Internet companies will need to marry cash-rich brick-and-mortar retailers to survive. The first such union happened back in January when Yahoo's chief rival for "eyeballs," Dulles-based America Online Inc., announced that it would acquire Time Warner Inc.
At the time, the business world was shocked. Now, some say such combinations of inevitable. Walt Disney Co., News Corp. and eBay have been named as possible suitors for Yahoo. Koogle has not ruled out the possibility of a major merger.
Some analysts say the big advantage of Yahoo's business model – the fact that everything is free for consumers – is also its biggest disadvantage. It's a philosophy that has helped gain trust for its brand name and has appealed to Netizens because it meshes with the original vision of the Internet. But it depends on the whim of consumers to respond to those ads. Studies show that few people click on the popular banner ads on most portal sites and advertising experts have been experimenting with other online strategies to try to get Web visitors to respond.
Yahoo in recent months has moved aggressively to diversify its revenue, 80 percent of which comes from ads. It has invested millions into its Yahoo Everywhere strategy to make its service available on cell phones and hand-held devices. It has begun working with corporations to build customized "Intranets." And it has launched several free Internet access services with companies such as Kmart and Spiegel; the Kmart service already has signed up 2.5 million subscribers, making it one of the 10 largest in the country.
Unlike some of its competitors, Yahoo has enjoyed a spectacular success overseas. Susan Walker White, an analyst with J.P. Morgan & Co., said that's one reason why her view of Yahoo's future remains bright. In the second quarter, 15 percent of Yahoo's revenue was from outside the United States, compared with 9 percent a year ago, and nearly 40 percent of Yahoo users live overseas.
"That's a major advantage that Yahoo has versus AOL Time Warner. AOL Time Warner will be primarily domestically focused – that's where the assets are for both companies," said Walker White, who also covers AOL. "And that leaves the rest of the world for Yahoo."
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