Yahoo! (Nasdaq: YHOO) the business and Yahoo! the stock seem to be on divergent roads so far this year. From a business perspective, the Internet megaportal's revenue and free cash flow are on a highway to heaven. The stock, on the other hand, seems to be on a rocky downhill trail ride. (Friday's washed-out rut was caused by an analyst downgrade.)

Tomorrow's second quarter earnings report may not change the stock's near-term direction, but even if it doesn't, what really matters is the long-term direction of the business. Among tomorrow's numbers, four trends to keep an eye on will be growth in unique users, registered users, average daily page views, and revenue. The degree of growth in these four success factors will go a long way in telling us how well Yahoo! is making rules these days.

1) Unique Users

Today's unique users are tomorrow's revenue because, as CEO Timothy Koogle often quips, "Dollars always follow eyeballs." As of last quarter, Yahoo! had 145 million uniques. Such a huge audience allows Yahoo! to add new services at a lower per-user cost than any of its competitors. And if you're much of a Yahoo! user, you know how Yahoo! is constantly adding new features. Recently, for example, Yahoo! doubled its e-mail storage capacity to 6.0 megabites -- three times more than available through Microsoft's Hotmail.

Yahoo!'s huge audience is what, more than anything else, attracts advertisers and merchants. And the audience continues to grow larger as Yahoo! expands globally and incorporates the best services (e-mail, calendar, customized news headlines, personal photos, etc.) into its network of offerings. As such, it's a virtuous circle of growing audience and advertising demand.

Here's how the uniques (in millions) have stacked up over the past year:

            99Q1  99Q2  99Q3  99Q4  00Q1  00Q2
Unique users  60    80   105   120   145   ?
Seq. Growth  20%   33%   31%   14%   21%   ?

It'll be interesting to see if seasonality impacts user growth this quarter. Last year's sunny months didn't seem to negatively impact Yahoo! at all, so maybe the growth continues unabated. Personally, I expect strong growth to continue for now because overseas Internet use is just beginning to accelerate up the "S" curve.

2) Registered Users

For all the reasons unique user growth is good, registered user growth is better. Yahoo! users who sign up for one of Yahoo!'s personalized services, such as e-mail or online bill payment, gain universal access to all of Yahoo!'s services. Even more significantly, however, they become part of the Yahoo! registered user database. The personal information in that database allows Yahoo! to deliver targeted marketing messages, for which advertisers pay a premium. Pretty nifty, huh? The best part is that the registered user database grows more valuable with each new registration -- the larger the targeted marketing audience, the more irresistible it becomes to advertisers.

Thereby, Yahoo!'s registered user database exhibits the wonderful economic phenomenon known as network effects. As stated in C.S. First Boston's excellent Network to Net Worth, "Network effects exist when the value of a good increases because the number of people using the good increases." In other words, Yahoo! stands to generate accelerating revenue off of its growing base of registered users.

User registration has other advantages, too. One is that registered users are repeat users. As you check your Yahoo! Mail day by day, you begin to notice that Yahoo! offers other cool tools, like a personalized calendar, writing journal, photo page, and a host of others. Yahoo! becomes not just useful, but essential to your life. You become an addict. From an investment perspective, that means you the user face "switching costs" if you ever want to defect from the Yahoo! network. Yahoo!, of course, is hard at work to make sure you would never want to leave anyway.

Out of Yahoo!'s 145 million unique users, an impressive 125 million are registered users. That's an awesome 86% conversion rate. Here are the numbers (in millions):

            99Q1  99Q2  99Q3  99Q4  00Q1  00Q2
Regist users  47    65    80   100   125   ?      
Seq. Growth  34%   38%   23%   25%   25%   ?

With only one exception (Q3 99), registered user growth has outpaced the growth of unique users. That's a fantastic trend, but one which can only go so far. Any incremental improvement from here is gravy.

3) Average Daily Page Views

The average number of daily page views tells us how much people are using the Yahoo! network. Page view growth has two legs: new users and increased usage (page views) by existing users. Both aspects are important, but increased usage (i.e. increased addiction) is especially nice. Strong growth in page views means Yahoo! is making progress towards its stated goal of being "the only place anyone has to go to get connected to anything or anybody."

Yahoo!'s page view numbers (in millions) have broken down as follows:

             99Q1  99Q2  99Q3  99Q4  00Q1  00Q2
Page views   235   310   385   465   625   ?      
Seq. Growth  41%   32%   24%   21%   34%   ?

Ideally, we'd like to see the average daily page view growth outpace the growth in unique users. This is analogous to a retailer increasing its same-store sales. Yahoo! has grown its page views faster than users for each of the past two quarters. That's another trend we hope will continue.

4) Revenue Growth

Last of our four success metrics is revenue growth. Our first three metrics were forward-looking, or in the parlance of economics, "leading indicators." In contrast, revenue growth is a lagging indicator, but an indicator nonetheless. Revenue growth is the most fundamental measure of business success. Increasing sales come via two avenues, both of which are very good: strong customer demand and pricing power. In the past, Yahoo! has benefited from both factors. Demand for Yahoo!'s marketing services is growing with the Internet, and because of Yahoo!'s dominance in herding eyeballs, the company has been able to increase prices along the way.

Recently, there's been considerable worry that Yahoo! will face lackluster revenues this quarter. Now that Wall Street is no longer throwing money at any old dot-com IPO, many of Yahoo!'s would-be customers in the Internet sector are presumed to have tightened their belts and reduced advertising spending -- and most of Yahoo!'s revenues are tied to advertising. As a result, Yahoo! may suffer this quarter from both lower demand and decreased ability to raise prices. (Rob offers some additional thoughts on this possibility in tonight's Fool on the Hill.)

Consider, however, that Yahoo!'s customer base is not at all dominated by cash-starved dot-coms. As of last quarter, Yahoo! counted 27 of the Fortune 50 as clients. Increasingly, I believe, Yahoo!'s profitability will come from the world's largest, most successful corporations. According to Advertising Age (one of the industry's most well-regarded trade publications), marketers and advertisers rank Yahoo! highest in both Best Ad Value and Best Environment for Advertising among all major online media companies. I expect Yahoo!'s position as the most highly trafficked Web destination will ensure that it continues to attract droves of clients. It'll be the second-tier portals that get hurt during an advertising slowdown.

For perspective, here's how Yahoo!'s quarterly revenues have looked for the past year:

             99Q1  99Q2  99Q3  99Q4  00Q1  00Q2
Revenue ($M) 104   129   155   201   228   ?      
Seq. Growth  25%   24%   20%   30%   13%   ?

Last quarter, Yahoo! earned $228.4 million in revenue. The consensus estimate for this quarter is $238.1 million, or 4% sequential growth. I think 10% sequential growth is more likely, which would amount to $251 million. No single quarter does a business make, but over time, Yahoo! needs to keep up an annual sales growth rate of at least 50% in order to justify its steep valuation.

So there you have it -- four items to keep tabs of when Yahoo! reports its second quarter results tomorrow after the bell. Next Monday, I'll examine Yahoo!'s quarter, report on any interesting notes from its conference call, and see how well it performed on the four metrics outlined today, along with some of our other more typical Rule Maker criteria. In the meantime, if you want to really understand Yahoo!'s business, I encourage you to check out Zeke's outstanding Motley Fool Research Report on Yahoo!

Also, if you've ever wondered to yourself, "How on earth can a startup like Yahoo! possibly be considered a Rule Maker? Isn't Rule Maker status reserved for more established blue chips like IBM, BellSouth, and Honeywell?," then this recent thread on the Rule Maker Beginners board will be of interest to you: Take Issue With Rule Maker Guides.

And finally, some big news out of JDS Uniphase (Nasdaq: JDSU) today. Our optical networking Rule Maker announced a substantial acquisition of fellow laser equipment manufacturer, SDL Inc. (Nasdaq: SDLI). To give you an idea of how big this deal is, SDL has a market cap of $25 billion versus JDSU's $80 billion price tag. Bill Mann has the full scoop in today's Fool Plate Special.

Fool on!

- Matt Richey, TMFVerve on the Boards