The New York Times Co. (NYSE:NYT) warned yesterday that its first-quarter earnings will be flat to slightly down vs. the same period last year and below many analysts' forecasts. It now expects to earn between $0.33 and $0.36 per share in the quarter, compared to $0.38 per share, before special items, in the prior year's first quarter.

Although the reduced expectations aren't likely to thrill investors, there is something in the Times' revenue mix that's cause for hope. While ad sales performance in February for traditional print newspapers and broadcasting was largely uninspiring, ad revenue for the online segment, New York Times Digital, surged 36.9%.

Year to date, the media firm's ad sales are up nearly 40%, compared to a decline in its print division and single-digit increases in other units. Before you get too excited, though, the digital segment constituted just 3.5% of the Times' total ad revenue so far in 2004.

All the same, the unit is making rapid strides toward establishing itself as a major growth engine. The compound annual growth for its revenue was 20.8% from 2001 to 2003, vs. 3% for the newspaper segment and 1.6% for the broadcasting area. Operating margin was a healthy 23% in 2003, above the 18% achieved by the newspaper group, and nearly as good as the 24.6% for the broadcast segment.

Investors should take comfort that the Times is keeping pace with marketwide growth in online advertising. The Interactive Advertising Bureau and PricewaterhouseCoopers reported that online ad spending increased 38% to $2.2 billion in the fourth quarter of 2003 compared to the same period in 2002. The increase represented the fastest growth in spending since the IAB began tracking ad sales in 1996.

The dizzying growth in online ads may feel a bit like back to the future for some investors, but evidence is mounting that this growth is not a mirage. McDonald's (NYSE:MCD) announced last year that it would spend less on TV ads and more online, while PepsiCo's (NYSE:PEP) Frito Lay decided to forgo ads in last year's Super Bowl and instead develop an Internet ad campaign.

The Times appears to be well ahead of competitors in capturing these new dollars. For 2003, The Washington Post Co.'s (NYSE:WPO) online ad revenues were $46.9 million, and Dow Jones (NYSE:DJ) brought in an estimated $21 million from Internet ads. The New York Times Co., meanwhile, recorded $88 million in revenue last year.

So, is the Times' lead in Internet advertising worth a premium? Maybe not yet, but if it can sustain the digital division's breakneck growth, it certainly merits consideration.

Fool contributor Brian Gorman is a freelance writer in Chicago, Ill. He does not own shares of any companies mentioned in this article.