When Yahoo! reports quarterly earnings on Wednesday, Wall Street expects the Internet bellwether to meet or slightly exceed estimates of $273 million, reflecting solid growth over last year. Looking ahead, Yahoo! is betting its biggest revenue growth will come from the relatively new businesses of premium services and paid search. But are consumers really ready to pay for content online?
THE IRAQ WAR doesn’t seem to have affected Yahoo!’s first-quarter revenues, as analysts expect the company to report a profit of 6 cents a share, up from 2 cents a share in the first-quarter last year, according to First Call estimates. Yahoo!, which is the first major Internet company to report first-quarter earnings, is expected to post sales of $273 million, up from $192 million for the same time last year, although down about 5 percent from the busy holiday quarter.
Wall Street will be watching whether the portal giant’s strong quarterly report reaffirms its steadily rising stock price — shares are up almost 70 percent over the past 12 months. The stock’s valuation is a reflection of its aggressive moves to diversify its revenue base as well as the expectation that Yahoo’s revenues will climb with its push into subscription services.
In particular, brand advertising revenues are rebounding, with anticipated sales of $178.5 million, a 30 percent year-over-year increase, although down slightly from the robust holiday quarter, according to Piper Jaffray estimates.
There has been speculation about potential ad cutbacks in the second and third quarters, so analysts will be listening for word on whether the Iraq war is expected to dent Yahoo’s high-margin brand advertising business. Earlier there had been projections of total online ad growth of anywhere between 10 percent to 15 percent in 2003 over last year’s approximately $5.6 billion, but that was before the war threatened to derail the U.S. economy’s fragile recovery.
Late last week, concerns about the ad market prompted Deutsche Bank to downgrade its Yahoo! position ‘hold’ from ‘buy’.
“It’ll be interesting to see how Yahoo! sees the advertising market, both the traditional branded ad market in particular and sponsored search,” said Mark Zadell, analyst with Blaylock & Partners in New York.
Yahoo! has made significant strides in boosting its ad revenues, but the company has been even more aggressive in trying to grow revenues from paid search and fee-based services, the money it makes from people who pay for personals, extra mail storage and Internet access. As a result, Yahoo! has cut its reliance on advertising from more than 80 percent of its revenues in 2000 to less than 50 percent in 2002.
The popularity of paid search is credited with lifting Yahoo! out of its profit slump — losing $93 million in 2001 — back onto healthy ground. Yahoo! has estimated that paid search could account for nearly 20 percent of its 2003 revenue.
According to some industry estimates, advertisers — mostly small businesses — are expected to spend more than $1.5 billion in 2003 paying to get their sites ranked at the top of the results of a search engine request.
In pursuit of paid-search profits Yahoo! acquired Inktomi search technology for $235 million in December, so it wouldn’t have to rely solely on rival Google. On Monday Yahoo! unveiled its new search service, a sleeker, faster engine which combines results licensed from Google’s index with Yahoo!’s array of customized services.
WILL THEY PAY?
There’s a lot of enthusiasm about online subscriptions in general. However, the paid services business on the Internet is relatively young and Yahoo!’s track record with its personals, programmable radio stations and games is just over a year old.
On one hand, Yahoo! has more than 200 million monthly users to try to convert into paying customers. Lanny Baker, analyst with Salomon Smith Barney believes Yahoo! has done “a very good job” at rolling out new subscription services, although there isn’t yet a blockbuster hit among the offerings.
By the end of 2002, Yahoo’s paying subscriber count grew from about 300,000 to 2.2 million.
In early March, Yahoo! launched a for-pay video “platinum” service, charging users $9.95 a month to watch video and audio from the NCAA basketball tournament, footage from CBS’ “Survivor” series,” backstage scenes from “American Idol,” The Weather Channel and NASCAR races.
But wooing people to pay for video clips will be a challenge, say analysts.
“Platinum has potential, but it’s yet to be seen how quick consumers will be to adopt such a service,” said analyst Zadell.
Gartner media analyst Denise Garcia says that mainstream “consumers aren’t yet ready to pay for access to premium content.”
“They will eventually,” she said, “but not in the dramatic way that Wall Street likes.”
On the positive side, Gartner found in new research that online consumers aren’t quite as resistant to paying for premium content as they were in the past. Almost 23 million Internet users, or 16 percent of the online population, already pay for some type of content. And the number of people who say they would not pay for online content has dropped from 52 percent in 2001 to 45 percent last year.