Yahoo!, DoubleClick Report From Ground Zero

Both Yahoo! and DoubleClick have strong industry positions built on disproportionate market share that helps them weather tough market conditions. If in their fourth-quarter reports neither Yahoo! nor DoubleClick offered bankable clues as to when a market turnaround will arrive, they offered even fewer reasons to doubt they'll still be standing when that day finally comes.

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By Nico Detourn (TMF Nico)
January 16, 2001

Direct from ground zero of the dot-com meltdown, Yahoo! (Nasdaq: YHOO) and DoubleClick (Nasdaq: DCLK) delivered their fourth quarter and full year 2000 results last week. They also offered some gloomy forecasts for 2001. What the companies said was reported with a tone of some surprise, which is perhaps odd given the economic environment of late. Not all the details Yahoo! and DoubleClick provided last week were pretty, but neither company said anything particularly new.

Limited visibility and whisper warnings
For DoubleClick especially, the fourth quarter's results should have come as no surprise. The message has been "trouble ahead" at least since DoubleClick's Q3 conference call, when the company took pains to guide expectations lower for Q4 and into 2001. That message was reinforced in early December when the company announced its first-ever layoffs.

As if it was needed, DoubleClick delivered yet another clue one week later in the form of an outright warning that the quarter would disappoint. Those separate announcements, each building upon the other, only reinforce the "limited visibility" the company cited last week when it again lowered expectations for 2001.

Unlike DoubleClick and so many other companies, Yahoo! never delivered the dreaded fourth-quarter earnings warning -- but it had signaled that things were slowing down. CEO Tim Koogle acknowledged during the third quarter that reduced dot-com advertising budgets and the attrition taking place among the weaker members of that species had taken away some "upside" potential to the company's earnings.

For the conservatively managed but always upbeat Yahoo!, which has traditionally beaten both estimates and "whisper numbers," Koogle's words sure sounded like a "whisper warning," an insider's suggestion that it was time to start adjusting expectations.

Trends in the right direction
With DoubleClick the world's largest online advertising company, it's certainly not encouraging that it earned only $216,000 during the fourth quarter of 2000. That works out to a nice round $0.00 per share. But while the December quarter capped a particularly difficult year, it's not as if the online ad business is moving in reverse.

As previously reported, DoubleClick's revenues for all of 2000 were nearly double those of 1999, the last full year before the ad slowdown. During the slow December quarter, sales at the company's ad-serving division were up 114%  over the same period in 1999, and even the company's slower-growing media division managed to grow 19% over December 1999 and more than doubled for all of 2000.

Eighty-eight percent of DoubleClick's main line customers advertised during both Q3 and Q4. Yahoo!, which gets about 80% of its revenue from advertising, similarly said 93% of its top 200 advertisers in Q3 carried over into Q4. Yahoo!'s ad clients increased to 3,700 from 3,450 in the fourth quarter. Although not directly related to advertising, Yahoo! reported enabling $1.4 billion in e-commerce transactions during the fourth quarter, up 100% over the fourth quarter of 1999.

Time on their side
Although the ad slowdown is real, online advertising is no more a fad than the Internet itself. Make no mistake: Both Yahoo! and DoubleClick said revenues will continue to be pulled down by a weak business and advertising environment. Both cut their projections for 2001 while offering uncertain, cautionary outlooks on the year. The companies said traditional advertisers had been slower to adopt the Internet than had been anticipated. Along with their peers and competitors, they've been saying that for a while now. The changeover is inevitable, however, and both companies have time on their side.

Both Yahoo! and DoubleClick have over the years achieved scale and strong industry positions built on disproportionate market share. That didn't make them immune to changing economic conditions, but it did tag them as clear leaders and provide each with a reputation built on unmatched operating experience. A nice cash hoard doesn't hurt, either.

Such assets, real and intangible, not only make difficult periods easier to weather, they also help the companies continue to capture market share. Cautious clients naturally turn to leaders, further pressuring competitors. And while neither Yahoo! nor DoubleClick offered bankable clues last week about when a market turnaround will arrive, they offered even fewer reasons to doubt they'll still be standing when that day finally comes.

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