Ad Revenue Not Cutting it for Yahoo!

As the industry’s bellwether, online advertisers and publishers are looking to Yahoo to prove that online advertising works not only for marketers but for publishers as well. But Wednesday’s announcement that it will miss its expected first quarter earnings predictions — as ad revenue continues to shrink and advertisers shy away — suggest that the online marketing arena is going to get worse before it gets better.

In a conference call with investors and analysts Wednesday, Santa Clara, Calif.-based Yahoo blamed macroeconomic conditions for the shortcomings in its media business in first quarter — forecasting revenues of $170 million to $180 million and expecting to breaking even on a before-charges, earnings-per-share basis.

The Street had expected $0.05 per share, on revenue of $232 million — and that’s only after a January 10 earnings warning by the firm, when analysts cut expectations from $0.13 and $325 million in revenue, according to First Call/Thomson Financial.

The worsening economy is causing Yahoo’s well-documented efforts to woo larger, traditional advertising clients to fall flat, it said — in addition to quickening the shakeout of its dot-com ad base.

“Most [traditional] businesses have frozen their commitments to short-term discretionary spending, such as marketing,” said chief financial officer Susan Decker. The impact on dot-com businesses from this slowdown also has “accelerated” a falloff in revenue from that sector for Yahoo, to the effect that “both are having a significant effect on our business.”

“The well-documented pullback of all companies has delayed spending … in the near term,” added Yahoo’s president and chief operating officer, Jeff Mallett. “Our spot buy ad business has been impacted by a more rapid decline in dot-com spending than forecasted.”

While Mallett said Yahoo’s “rollout of new advertising units is resulting in renewed interest in our base ad services,” that interest apparently isn’t translating into ad dollars, at least for the present. And that’s an unfortunate development for supporters of the Internet Advertising Bureau’s new, larger ad sizes (which Yahoo had a hand in recommending).

Yahoo’s bad news isn’t unexpected. Earlier this week, Goldman, Sachs & Co. cut its rating on Yahoo stock, anticipating revenue worries throughout the year and predicting that the company would have to distance itself from advertising — its chief source of revenue — during 2001.

Goldman did say that online advertising could be important to Yahoo’s revenues — at some indeterminate point in the future. But in the meantime, analysts predict that Yahoo has to hurry its transition from pure ad revenue over to its business services (like its Corporate Yahoo portal work) and its premium services.

That’s to combat what Goldman predicts as a 44 percent drop-off in expected ad and commerce revenues from Yahoo’s dot-com clients in 2001.

Yahoo didn’t disclose how many of its dot-com clients were being affected by the environment, nor did it specifically break out predicted dot-com revenue.

Goldman had also said that it doesn’t expect online media spending to increase as a percentage of overall ad spending during 2001. That obviously bodes poorly for Yahoo even beyond first quarter: the firm has inked deals in recent months with such companies as Pepsi and Procter & Gamble, and had been looking for similar deals in the future.

Now, those plans apparently will have to be pushed back somewhat.

“A broad range of customers is delaying spending till visibility improves,” said chairman and chief executive Tim Koogle, causing “revenues and profits to fall short in the marketing services portion.” Koogle is stepping down as CEO but will remain as chairman.

Decker added that differed revenue would increase from what’s typically 45 to 50 percent of Yahoo’s revenues to 65 percent to 70 percent — due to the “stalling” of corporate budgets.

Executives said that to weather this downturn in its media business, Yahoo would continue working to boost its other businesses, with the result that the company’s business services would generate a greater share of revenue during the year.

Decker said the Corporate Yahoo business is growing according to plan, which she said is “good news, and indicative of potential to drive growth in the long term.”

Koogle also remained optimistic about what Yahoo is clearly hoping will pan out into three viable revenue streams — or what Decker called an “inherently profitable business model.”

“We remain committed to our three core services: marketing services, business service and consumer services,” said Koogle. “We are continually building our sales channel out to large marketers … we have one of the world’s most valuable brands, and one of the largest and most active user bases.”

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