• by Kate Kaye , July 7, 2004

Analysts expected another strong earnings report from Yahoo!, and the Sunnyvale, Calif. Web colossus didn't disappoint. In the second-quarter period ending June 30, the Internet bellwether's revenues rose 159 percent over the same period last year. The dollars flowed primarily from search marketing and brand advertising revenue. Yet on news of a weaker than expected earnings forecast for Q3, shares fell almost 13 percent.

During an earnings Webcast, Yahoo! Chairman and CEO Terry Semel delighted in the firm's "fifth straight quarter for record revenues," marking the period as a time of "significant opportunity."

Yahoo!'s Q2 2004 revenues totaled $832 million--up 159 percent over the $321 million posted in Q2 2003. Marketing services revenue (total revenues minus traffic acquisition costs) came to $691 million--a leap of 215 percent over Q2 2003's $219 million. The company attributes the growth to strong marketing services revenues from search and ad buys, as well as incremental revenue from last year's acquisitions. The second-quarter numbers also mark a significant increase in quarter-over-quarter revenues which hit $758 million in Q1 2004.

"They're really firing on all cylinders," notes Forrester Research Analyst Jim Nail. While Nail observes that "a big chunk" of the firm's revenue is coming from its search marketing offerings, he concludes: "Everything's going at a pretty healthy rate."

Despite the formidable quarterly revenues, at the market's close, Yahoo!'s shares dropped nearly 13 percent on a lowered Q3 forecast. The firm predicted revenues, excluding traffic acquisition costs, of $610 million to $650 million for Q3 2004. However, the company boosted its revenue outlook for all of 2004 to between $2.46 billion and $2.54 billion.

At $104 million, Yahoo!'s fees revenue was also up--nearly 50 percent. The firm attributes the increase to a boost in premium services subscriptions, which rose from 3.5 million in June 2003 to 6.4 million as of June 2004. Yahoo!'s paid subscriber base encompassed 5.8 million paid subscribers in Q1 of this year, bringing in $88.5 million in fees revenue.

Revenues collected from search and marketplace listings also saw a lift--up 17 percent from $32 million in Q2 2003 to $38 million in Q2 2004. Listings revenue totaled $34 million during Q1 2004.

Yahoo! reported 300 million unique users during Q2 2004--up 27 percent from 236 million in the same period last year. In addition, active registered users were up 26 percent year-over-year to 146 million.

Influenced by positive online ad spending outlooks, analysts have had their eyes on Yahoo!'s brand advertising business. Semel noted during the earnings Webcast that the top 200 brand advertisers had a repeat advertising rate with Yahoo! of greater than 90 percent. The media giant claims that its focus on market verticals is also paying off, noting that it is seeing increases in ad dollars across all categories, including retail, auto, and consumer packaged goods.

Yahoo!'s Overture search division grew its network and formed new relationships overseas. As noted during the earnings Webcast, the company expects its overall marketing services business in 2004 to exceed the 35 percent growth previously forecast--implying that it will gain market share in the expanding search and display ad segments. Yahoo! claims to have received a favorable response to last week's launch of its Local Match offering, adding that approximately 25 percent of commercial searches are local in nature.

Jeetil Patel, Senior Analyst at Deutsche Bank Securities, Inc., believes that local search will continue to be a significant component of Yahoo!'s business. Yet he suggests: "Near term, I think the bigger focus is going to be on the home page redesign." Specifically, Patel is interested in seeing how Yahoo! incorporates local and standard search into its upcoming home page redesign, and how rapidly it builds out its local search advertiser programs. Yahoo! recently expanded a beta test of its search page redesign.