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SEPTEMBER 17, 2002 STREET WISE By David Shook Can Yahoo Do a Number on the Skeptics? The portal projects yearend revenues of up to $940 million. Even though it's less dependent these days on ads, that remains a tall order
Whether Yahoo (YHOO ) is able to make a complete turnaround, however, depends on its ability to continue generating revenue from sources other than advertising -- especially with the online ad market still in hibernation. So far, Yahoo under the guidance of CEO Terry Semel, seems to be on the right track. It acquired HotJobs.com, the No. 2 employment Web site (behind Monster.com), for $436 million in cash and stock earlier this year. Also, Yahoo has cut into rival America Online's territory by selling subscription-based broadband Internet access via an exclusive arrangement with Baby Bell SBC Communications (SBC ). These steps have lessened Yahoo's dependence on ad sales and allowed it to show profits for the first time in two years: In the second quarter, Yahoo reported earnings of $24 million. That's a meager amount by some standards, but it represents black-ink during the ad-market slump. RELATIVELY EXPENSIVE. Despite his success so far, Semel may have been overly optimistic in projecting revenues of as much as $940 million for 2002, analysts suggest. The risk that Yahoo could miss its yearend target, combined with the ad downturn, has contributed to a sharp decline in the stock price. It closed at $10.18 on Sept. 16, down some 50% from a 2002 high of $21.35 in January. And even at the current price, the shares are still relatively expensive. Merrill Lynch values the stock at 12 times 2003 earnings -- a premium to the 10 times earnings many traditional media companies enjoy. With pressure on Yahoo to meet its revenue target, the stock isn't likely to see much growth through the rest of the year. Some analysts have expressed concern that Yahoo -- despite having earnings in the first half of 2002, and almost three years of net earnings before the dot-com collapse -- no longer provides any earnings guidance, only sales estimates. That will give many investors pause before diving in. Yahoo insists it will have revenues of $225 million to $250 million in the third quarter and $900 million to $940 million for the year. But the latter figure appears to be a stretch given the still-weak ad market, the slow rollout of Yahoo's broadband service, and the lackluster job-listings business. BUYING TIME? During Yahoo's second-quarter earnings call, Semel had the chance to provide earnings guidance for the rest of the year but didn't. While that may have been a sign of confidence in the sales estimates, he could also have been buying time in the hope that the cash Yahoo generates from big, loyal advertisers such as Gap (GPS ), Kellogg (K ), and Pepsi (PEP ) proves sufficient to drive annual revenues beyond $900 million. Also helping Yahoo: A marketing pact with Overture (OVER ), the leading provider of paid Web-search listings. Yahoo gets royalties every time a user clicks on a site from Overture's sponsored search results. Even with some loyal blue-chip ad clients bolstering its bottom line, Yahoo still faces a big risk related to advertising. Last year, forecasters predicted a healthy ad turnaround by the second half of 2002 -- but it hasn't materialized. The industry's largest beneficiary of Internet ad sales, America Online (AOL ), also revised its guidance downward for the fourth time in a year because of the weak ad market. (AOL lowered its 2002 online advertising guidance on Sept. 9 from $1.8 billion to $1.7 billion, which would be a 37% decline from 2001.) "The fundamentals for Yahoo may be getting worse," wrote Merrill Lynch analyst Justin Baldauf in a Sept. 9 note to clients. (Merrill Lynch has an investment-banking relationship with Yahoo.) SLOW START. Semel could prove the skeptics wrong. But his plan requires several things beyond his control to fall into place perfectly. For example, Semel predicted last fall that the Internet access deal with SBC would generate $20 million to $30 million in 2002 revenues. But one analyst says the venture has gotten off to a slow start. While Yahoo began selling traditional, dial-up Internet service to SBC telephone customers earlier this summer, the high-speed side of the deal didn't launch until Sept. 13. HotJobs, which is slated to account for 10% to 15% of Yahoo's annual revenues, operates in an industry suffering from a cyclical slump. Monster.com's operating profits declined 48%, to $18.8 million, in the second quarter. Selling job listings and doing executive searches isn't a robust business in this economy. "Nobody seems to have connected the dots between the poor earnings at Monster.com and the likely performance of HotJobs," says WR Hambrecht analyst Derek Brown, who rates Yahoo a sell (Hambrecht has no investment-banking ties with Yahoo). APPLAUSE, TOO. For now, Yahoo says it stands by its estimates. "As we execute against our business plan, we expect to continue to deliver strong results and profitable growth through the remainder of the year," Semel said in his July 10 conference call. And while analysts remain skeptical, for the most part they still applaud Semel's actions since he took the helm at Yahoo at its nadir in mid-2001. Yet at this point, a full-fledged online ad rebound -- still a mirage for Web companies -- may be the only sure way to light a fire under Yahoo's stock.  Shook covers the markets for BusinessWeek Online in New York Edited by Beth Belton Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | SEPTEMBER |
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