Yahoo! Makes Numbers, Reveals Search, Streaming Plans

Yahoo’s first quarter profits came in at $159.9 million, or $0.11 per share, a decline when compared to 2005’s first quarter. But revenues of $1.6 billion were 34 percent higher than the comparable 2005 number, largely due to strength in online advertising. The net income numbers were in line with what analysts expected.

The company blamed changes in accounting for stock-based compensation for the decline in net income.

“Yahoo is really off to a good start in 2006,” said chairman and chief executive officer Terry Semel in a conference call with investors.

Marketing services revenues, which encompass both search and display advertising products, represented $1.4 billion in revenues, a 35 percent increase over the same period in 2005.

The company no longer breaks out search and display advertising, but said both performed well in the quarter.

“Within graphical advertising, we continue to deliver outstanding results and believe that we are outperforming this segment,” Semel said. He added the company was seeing strength particularly in the pharmaceutical, telecom, consumer packaged goods, automotive and financial services verticals.

Though Semel said the company was seeing “advanced buying” of graphical and video media, he later indicated video had not yet made a huge impact. That’s because he believes video content and advertising are in their early stages. “It’s only just begun,” he said. “It’s very early days.”

Semel strongly suggested, however, that Yahoo was in partnership talks with television networks to host ad-supported streams of TV programming, saying companies that had formerly only been interested in protecting themselves were finally interested in doing distribution deals.

“The big, big change for us as an industry is that probably prior to six months ago, potential partners were talking about not doing very much,” he said. “Now they’re talking about what they might do. it’s very, very exciting.”

Making TV shows accessible exclusively on networks’ own sites, Semel said, is a bad idea. “There are just great opportunities for Yahoo now in all of these areas,” he said.

TV networks’ interest in digital distribution began to explode with ABC’s decision to make popular shows like “Lost” and “Desperate Housewives” available for paid download on Apple’s iTunes service. The Disney unit recently upped the ante again by saying it would make those same programs, and others, available with non-skippable ads on its Web site.

In the search arena, Yahoo’s biggest news, which leaked in an analyst’s report, is that it will begin to take factors other than bid price into account when ranking paid search ads. Google already does this by considering click-through rate.

The changes will occur, Semel said, as part of a three-stage roll-out of a new platform for advertisers. First, the company will migrate to new infrastructure, to enable it to handle more volume. Next, Yahoo will roll out an updated advertiser interface, which it says will improve ease-of-use. Then, the ranking changes will be implemented. These shifts will take place over the course of the next year, said Semel.

“In terms of our new advertising platform, we see our biggest competitive opportunity on the yield enhancement,” said Sue Decker, Yahoo’s CFO. “We see the biggest opportunity on relevance and potentially on click-though rate.”

Search volume on Yahoo, Decker said, is growing at around 15 to 20 percent year-over-year. The company’s ability to make money from those searches is improving, too, with revenue per query growing between 5 and 10 percent year-over-year, she indicated.

The company made much on the conference call of plans for social search and the development of user-generated content.

“Clearly we think search is at the very beginning and we think there will be meaningful change in that category,” said Dan Rosensweig, Yahoo’s COO.

As for user-generated content, Semel praised the in-beta Yahoo Answers product, and promised that another effort in the entertainment vertical is in the works.

In the fee arena, Yahoo brought in $186 million in revenues, a 25 percent increase over the same 2005 quarter.

For the second quarter of 2006, Yahoo expects to bring in revenues of between $1.1 billion and $1.2 billion, resulting in operating income of between $415 million and $455 million. In all of 2006, the company intends to generate revenues of $4.6 billion to $4.9 billion, with operating income of $1.9 billion to $2 billion.

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