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When Yahoo! Inc., one of the Internet sector’s bellwether stocks, reports its earnings following the market’s close on Wednesday afternoon, the news will be scrutinized closely for several reasons. Lately, the markets have been following corporate earnings reports with extra intensity, looking both for signs of just how the dire the economic slowdown truly is and some glimpse of a turnaround.
The worrisome trend has been particularly hard on the Internet advertising sector, where Yahoo! far and away leads the market. By the end of the fourth quarter, it was clear that across the sector, ad revenues for the latter part of 2000 were going to fall short of both the forecasts that had been made earlier in the year and the growth rate from the same period in 1999.
What’s worse, the downward slide will probably last at least through the second quarter.
On the one hand, Yahoo!’s fourth quarter results will probably confirm the severity of the slowdown, but they will be gone over with a fine-tooth comb for an indication of two trends that could point to the eventual turnaround. Analysts will probably look to see if Yahoo! has increased its share of the Web advertising market and by how much.
Yahoo! set such a high standard for growth in 1999 that it will have difficulty topping its performance with its 2000 results. In the fourth quarter of 1999, Yahoo! reported $201.1 million in sales, a 120 percent gain from the fourth quarter of 1998. For all of 1999, the company had sales of $588.6 million, or 140 percent more than it had in 1998.
By the time the company reported its third quarter 2000 results, the signs of some tailing off were evident. Yahoo! reported sales of $295.5 million, or 90 percent more than $155.9 million in revenue during the third quarter of 1999. In normal circumstances, top line growth of 90 percent would be considered phenomenal, but, as anyone who’s been following the Internet market understands, these are not normal times.
The slowdown is expected to be even more pronounced in the fourth quarter results. According to wire reports, Wall Street is expecting to see a top line growth of $315 million to $320 million, which translates to a growth rate in excess of 50 percent. Once again, such growth would be impressive in normal circumstances, but with the slowdown from last year’s unprecedented rates, the new figure is more a cause for concern.
But despite the slowing revenue growth, an important indicator will be the extent to which Yahoo! has increased its share of the market. The revenue figure should confirm the impact of industry consolidation.
Already, 200 or more dot-com firms have failed, and that leaves larger slices of the pie to the survivors. Keep in mind that although the Web advertising market is growing more slowly than before, it’s still growing, and once the slowdown ends, the survivors will have a larger market to carve up and fewer competitors to deal with.
There’s also going to be a great interest in the contribution to the top line coming from non-advertising sources, particularly fee income. According to Cnet, Yahoo currently gets 90 percent of its revenue from advertising.
Second, Yahoo! announced on Tuesday that its business of building Web portals for corporate clients has added McDonald’s, Bayer, Reuters, Janus Capital and Seagate Technology, as customers.
The news is another sign of the maturity in the Web market. The Web firms that survive the shakeout will be less dependent on advertising revenue and more sophisticated in marketing their New Economy expertise to Old Economy companies.
In the last few months, it’s become a cliché that the clicks-and-mortar strategies of Old Economy stalwarts will overtake the purely dot- com strategies of New Economy upstarts. But if the handful of survivors from the dot-com wreckage, such as Yahoo!, develop enough of a market for selling their services to established companies, modifiers like Old and New won’t be so important, and we can soon start talking about one economy again.