• by Michael Shields , April 7, 2004

In the most successful quarter in its short history, Yahoo! late Wednesday blew away even the most optimistic analyst expectations, reporting first-quarter revenues of $540 million and profits of $101 million for the period ending March 31. Yahoo!'s first-quarter revenues were up a whopping 91 percent compared to the year-ago period.

The lion's share of Yahoo!'s first-quarter revenue--$418 million--was driven primarily by "Marketing Services," which includes online advertising. The figure represents an eye-popping 120 percent increase over the first quarter of 2003 ($190 million).

Yahoo!'s audience size exhibited healthy growth. The number of unique users reached 274 million--up 18 percent--while registered users increased 26 percent to 141 million.

Yahoo!'s fee-based premium services experienced growth as well, achieving 5.8 million paid subscribers, an increase of 900,000 versus the fourth quarter of 2003 and twice as many as a year ago. Fee-based services drove $88.5 million in revenue, up 39 percent year-over-year, while Yahoo!'s Listings business, which includes HotJobs.com, accounted for $33.8 million--up 16 percent from last year.

Yahoo! doesn't break out subscriber numbers for its premium services, which include Personals, its Launch music service, Fantasy Sports, and extra storage. It also doesn't break out revenues derived from paid search. Yahoo! late last year acquired Overture Services, a pay-for-performance advertising provider, which is helping drive Yahoo!'s revenue surge.

The company attributed its strong earnings to a focus on improved product offerings for advertisers and the fact that more traditional marketers are spending money on online advertising and promotion.

Commenting on Yahoo!'s first quarter, Safa Rashtchy, Internet analyst with US Bancorp Piper Jaffray, said: "It was just awesome, it was unbelievable and well above our estimates." Rashtchy characterized Yahoo!'s impressive earnings as a kind of "breakout" performance in online advertising. Paid search, he said, had been expected to grow, but the "upside was evenly distributed."

Most analysts were high on Yahoo! heading into Wednesday's earnings announcement, projecting first-quarter revenue growth in the neighborhood of $500 million or higher. Even the highest estimates, such as JP Morgan Equity Research's $511 million estimate, fell well short of Yahoo!'s stunning windfall.

Imran Khan of Fulcrum Global Partners was particularly bullish. "The search market is very strong, and the online advertising market is strong," he said. "We think [Yahoo!] will exceed expectations."

Khan cited the Fulcrum Keyword Index--by which his company measures the average price of 125 selected keywords--as being up 15 percent since the beginning of the year, another indicator of solid growth in the online sector. Khan was also high on Yahoo!'s HotJob's business.

Good news from Yahoo! is generally viewed as good news for the online ad industry as a whole. Time Warner's America Online, Microsoft Corp.'s MSN, and Yahoo! account for nearly one-third of all online advertising dollars, according to eMarketer, an aggregator of Internet media research.

Yahoo! also raised its second-quarter and full-year earnings estimates. The company predicts that second-quarter revenue will fall in the range of $508-$618 million and roughly $2.5 billion for the year. Its previous estimates were for $532 million in the second quarter and $2.2 billion for the year.

Separately, Yahoo! announced a two-for-one stock split for shareholders.