Yahoo! reported third-quarter results from the heart of the dot-com meltdown. The company is weeding through dot-com pure-plays to strengthen its advertiser base and reduce its exposure to financially questionable clients. Nevertheless, the company's chief financial officer said the drag from troubled dot-coms will continue into the next year as the industry "rationalizes towards fewer but stronger participants."
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Earnings for the quarter, excluding acquisition-related and other customary charges, were $81.1 million or $0.13 per share, compared to $38.5 million or $0.06 per share one year ago. Consensus estimates for the quarter were $0.12 per share. Shares of Yahoo! traded down 3.6%, closing at $82.69 on nearly twice average volume ahead of today's eagerly anticipated announcement.
In addition to the top and bottom lines, Yahoo!'s non-financial numbers -- reflecting the behavior and actions of its users -- are also closely watched. Worldwide, including Japan and Europe, Yahoo! had more than 166 million unique users in September. Cumulative worldwide registered users grew to a record 185 million, an increase of 19% from 155 million in June.
Traffic across Yahoo!'s properties increased nearly 15% to an average of 780 million page views per day in during September, compared to 680 million last June. In addition, the amount of time users spend with Yahoo!'s properties also grew as did visitor retention, according to numbers from Media Metrix and Nielsen//NetRatings, which the company cited in the press release announcing its results.
As an indication of what people are doing online, the company said in a conference call that text usage was being rapidly supplemented with audio, video, and voice services and that it had 75 million unique broadband users. The company hosted and distributed over 15 million hours of streaming audio and video programming during the quarter, up 15% since June.
The dot-com drag
Advertising is what pays Yahoo!'s bills and concern over the financial condition of the company's client advertisers and merchants has been a source of speculation during the quarter. Signs of the company's vulnerability to the well-documented ad slowdown were indeed visible.
Yahoo! served 3450 advertising clients during the quarter, a decline of 6.12% from June that was not entirely unexpected and reflects a thinning in the ranks of dot-com advertisers. As a result, Yahoo!'s $1 billion in total worldwide transactions for the third quarter were flat with last quarter. These numbers are obviously not what the company wants to see, and it emphasized the quality over the quantity of its contracts and directed attention to how it is managing its client base as the industry moves through this period of adjustment.
Average contract length increased to 235 days during the quarter as the company decided not to enter into longer-term arrangements with questionable clients. Only 40% of Yahoo's advertisers were "born and bred on Internet," down from 47% last quarter, the Internet company's president and chief operating officer, Jeff Mallett, said during the conference call.
These clients' contribution to total revenues is under 10% and continues to decline, with only 18% of clients exclusively buying banner ads, the least efficient form of advertising. Barter revenue is also declining.
Yahoo! said that that its top 200 clients include 30 of the Fortune 50, and 60 of the Advertising Age top 100. It said that 60% of its revenues come from only 6% of its total clients, and that the majority of those are "traditional" companies. Mallet said the company will continue to reduce its exposure to financially questionable clients and "weed through the pure plays who will get their footing," as opposed to less viable clients. Yahoo! welcomes "the Web being held to a much higher standard," Mallet said.
At the same time, Chief Financial Officer Susan Decker said that we should "assume that the drag from the dot-com issue will continue" into the next year as the industry "rationalizes towards fewer but stronger participants."
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