Good Results at Yahoo!

By Matt Richey (TMF Verve)

ALEXANDRIA, VA (July 12, 1999) -- After market close last Wednesday, Yahoo! (Nasdaq: YHOO) reported outstanding second quarter results. Here are some of the highlights:

  • Revenues of $115 million, beating estimates for $103 million
  • Net income of $0.11 per share, beating estimates for $0.08
  • Sales growth of 156% (year-over-year)
  • Gross margins of 86.3%
  • Net margins of 24.6%
  • Cash of $638 million and no debt
  • Flow Ratio of ~0.32

Dale Wettlaufer did a nice job of detailing the financial results in last Thursday's Fool on the Hill, but today and tomorrow I'd like to look at the results from a Rule Maker perspective, as well as cover some of the additional details that were mentioned in the conference call. Having spent last week covering our 10 investment criteria in the Back to Basics series (Parts 1, 2, 3, 4), let's examine Yahoo!'s results in the framework of those 10 RM Essentials, looking today at the first five.

1. Dominant Brand

During the quarter, Yahoo! completed its acquisition of GeoCities, giving the combined company an Internet-leading 80 million unique visitors, of which 65 million are registered users. Traffic boomed during the quarter with average daily page views climbing to 310 million, up from 235 million a quarter ago. The average Yahoo! user now spends over an hour each month on the site -- by far the most of any portal. In addition, the NPD Group has ranked Yahoo! #1 for the categories of most bookmarked, most recommended, and most often-used website, thereby making Yahoo! #1 in overall ratings versus similar services. I think it's safe to conclude that Yahoo! is the dominant brand of the Internet.

2. Repeat-purchase Business

According to CEO Tim Koogle ("T.K."), Yahoo!'s modus operandi is to establish scale, then leverage and extend relentlessly into new services in a self-reinforcing way. If you listen to the conference call, you'll hear T.K. repeatedly use the words "self-reinforcing" to describe Yahoo!'s services. Web mail, personalized home pages, online calendars, stock portfolios, auctions, chat rooms, message boards -- these services are all "sticky" applications that users are likely to return to day-in, day-out in a habitual way. With each passing quarter, Yahoo! builds and markets new apps to become an increasingly necessary part of users' lives. As much as any other company in the Rule Maker portfolio, Yahoo! exemplifies a repeat-purchase business model.

3. Convenience

On the surface, it may seem that Yahoo!'s services are no more convenient than that of any other website, but as a daily Yahoo! user, I would argue otherwise. Since its inception, Yahoo! has designed its site with minimal graphics making page-loads much faster than average. Site speed definitely encourages greater use, and the Media Metrix and NPD Group numbers bear this out. In addition, Yahoo!'s e-mail and auction services have scaled effortlessly with increasing users, whereas competitors such as Microsoft Hotmail and e-Bay have suffered notorious outages. Finally, the Yahoo! Companion provides users the added convenience of a dedicated search and one-click access to Yahoo! through a plug-in that becomes part of your browser. Convenience is a subjective measure, but from my experience, Yahoo! is the clear leader among the major portals.

4. Expanding Possibilities

Not a week passes without some sort of new or expanded offering from this company. During Q2, Yahoo! successfully completed the first phase of integrating GeoCities' 4.6 million unique homesteaders into the newly designed Yahoo! GeoCities. Some other major developments include:

- With the recent addition of Yahoo! Brazil, Yahoo! has 19 world properties in 12 different languages. Approximately one-third of the company's 80 million users are from outside the U.S. As more of the world comes online, Yahoo! is well-positioned to capture a major share of the non-U.S. market, which is expected to surpass the size of the U.S. audience in only a few years.

- Auctions Express allows businesses to automatically upload hundreds of items into auctions with a simple click of a button. During the quarter, Yahoo! Auctions experienced 300% growth in the number of items auctioned. In addition, local auctions are opening on almost a weekly basis.

- Yahoo! Messenger, the company's instant messaging service, now has voice capability for registered users.

- Yahoo! Finance now offers mortgages and auto loans in the recently opened Loan Center. In addition, online banking is now available to Bank of America clients, and other banks will be added in the months ahead.

- Yahoo! Radio, which offers users direct access to radio programming and will take advantage of the synergies of the broadcast.com acquisition, is expected to be completed this month -- a month ahead of schedule.

- Yahoo! Health, where you can locate a physician, get answers from health experts, and obtain the latest health news.

- Yahoo! Store, which allows small businesses to quickly begin selling their wares online, added 1,100 participating merchants and now has 5,800 in total.

5. Your Familiarity and Interest

As I've mentioned before and as you can probably tell, I'm a daily user of Yahoo! services. I've tried most of the other portals, and I'm convinced that Yahoo! is the industry's innovator, and the rest are just copycats. With a rapidly growing base of 80 million happy users, Yahoo! is doing an impressive job of executing on its strategy of creating self-reinforcing consumer applications.

During the second quarter, the company extended market share among users, built a deeper set of communication services, and continued proactive and prudent acquisition of companies that further the Yahoo! strategy. Tomorrow, I'll discuss the state of Yahoo!'s advertising business, as well as offer some further detail of the financial results.

For the full story of the quarterly results, here are links to the conference call replay and earnings press release.

Good night!

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    07/12/99 Close

    Stock Change    Bid
    AXP   +1 3/4    135.25
    CHV   +1 11/16   98.94
    CSCO  -1 7/16    65.63
    EK    +1 11/16   72.81
    GM    +2 9/16    68.69
    GPS   -2 1/16    49.50
    INTC  -  13/16   65.44
    KO    -  9/16    63.06
    MSFT  +  15/16   94.19
    PFE   +  3/8     37.38
    SGP   -  3/8     52.00
    TROW  +1         35.63
    XON     ---      79.44
    YHOO  -9 3/4    150.25
                      Day     Month  Year    History
            R-MAKER  -0.20%   1.55%  15.51%  46.16%
            S&P:     -0.30%   1.92%  14.40%  41.46%
            NASDAQ:  -0.09%   3.90%  27.26%  68.82%
    Rule Maker Stocks
        Rec'd    #  Security     In At       Now    Change
        2/3/98   48 Microsoft     39.13     94.19   140.68%
       6/23/98   68 Cisco Syst    29.21     65.63   124.70%
        5/1/98 82.5 Gap Inc.      22.91     49.50   116.03%
       2/13/98   44 Intel         42.34     65.44    54.56%
        2/3/98   66 Pfizer        27.43     37.38    36.24%
       5/26/98   18 AmExpress    104.07    135.25    29.96%
       2/17/99   16 Yahoo Inc.   126.31    150.25    18.95%
       8/21/98   44 Schering-P    47.99     52.00     8.35%
        2/6/98   56 T. Rowe Pr    33.67     35.63     5.80%
       2/27/98   27 Coca-Cola     69.11     63.06    -8.75%
    Foolish Four Stocks
        Rec'd    #  Security     In At     Value    Change
       3/12/98   20 Exxon         64.34     79.44    23.47%
       3/12/98   15 Chevron       83.34     98.94    18.71%
       3/12/98   20 Eastman Ko    63.15     72.81    15.31%
       3/12/98   17 General Mo    72.41     68.69    -5.13%
    Rule Maker Stocks
        Rec'd    #  Security     In At     Value    Change
        2/3/98   48 Microsoft   1878.45   4521.00  $2642.55
       6/23/98   68 Cisco Syst  1985.95   4462.50  $2476.55
        5/1/98 82.5 Gap Inc.    1890.33   4083.75  $2193.42
       2/13/98   44 Intel       1862.83   2879.25  $1016.42
        2/3/98   66 Pfizer      1810.58   2466.75   $656.17
       5/26/98   18 AmExpress   1873.20   2434.50   $561.30
       2/17/99   16 Yahoo Inc.  2020.95   2404.00   $383.05
       8/21/98   44 Schering-P   2111.7   2288.00   $176.30
        2/6/98   56 T. Rowe Pr  1885.70   1995.00   $109.30
       2/27/98   27 Coca-Cola   1865.89   1702.69  -$163.20
    Foolish Four Stocks
        Rec'd    #  Security     In At     Value    Change
       3/12/98   20 Exxon       1286.70   1588.75   $302.05
       3/12/98   15 Chevron     1250.14   1484.06   $233.92
       3/12/98   20 Eastman Ko  1262.95   1456.25   $193.30
       3/12/98   17 General Mo  1230.89   1167.69   -$63.20
                                  CASH    $232.29
                                 TOTAL  $35166.48

    Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.

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