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The contrarian view on Yahoo!
Traders lopped $9B off its market cap, but the numbers show the firm's media machine is just fine.
By Owen Thomas, Business 2.0 online editor

SAN FRANCISCO (Business 2.0) - Where does $20 million equal $9 billion?

Only on Wall Street.

Yahoo! stock sank after the bell Tuesday after the company reported its missed earnings in the fourth quarter and announced disappointing sales guidance.
Yahoo! stock sank after the bell Tuesday after the company reported its missed earnings in the fourth quarter and announced disappointing sales guidance.

In after-hours trading following Yahoo's fourth-quarter earnings announcement Tuesday, its shares dropped 13 percent, shaving $9 billion off the Internet media concern's market capitalization after it saw revenues jump 39 percent year over year—but missed earnings estimates by a penny.

The culprit? According to comments made by Yahoo! Chief Financial Officer Sue Decker in the company's quarterly conference call, the company spent a bit more in the fourth quarter to launch a convergence initiative at the Consumer Electronics Show, and shelled out a reported $20 million for social-media startup Del.icio.us.

Could that $20 million be worth the multibillion-dollar scalping Yahoo! took? Fans of managed earnings would say no, that Yahoo! should have passed on the acquisition and had CEO Terry Semel skip out on his CES keynote. But is that any way to run a company in an industry as fast-changing and competitive as the Web?

The biggest trouble signs came in search advertising. Decker acknowledged that the company had struggled to "monetize" its ads. Translating from Silicon Valley jargon, that means that Yahoo! didn't make as much money per Internet search as it believes it will be able to.

Optimizing Internet search advertising isn't easy. It involves a lot of math -- it's practically rocket science. Lucky thing, then, that Yahoo! has a research lab in Pasadena, Calif., not far from the Jet Propulsion Laboratory. There's no reason why the lab's whiz kids shouldn't be able to figure out this monetization trick.

In the meantime, Yahoo's sales force, which has been overhauled to sell both banner and search ads, has been going gangbusters. While Yahoo! doesn't break out banner and search advertising separately, Nielsen/NetRatings estimates that Yahoo's banner-ad sales rose from $241 million in the fourth quarter of 2004 to $390 million in the fourth quarter of 2005 -- a staggering 62 percent rise. The industry hasn't seen that kind of growth in banner advertising since the third quarter of 2000.

Semel noted in the call that categories like finance and auto saw big increases, suggesting that the company has had success getting some of the largest advertisers to increase their spending with Yahoo!.

One could argue, of course, that Yahoo's (Research) stock had run too far, too fast, and was overdue for a correction. But nothing in Yahoo's earnings suggested that the company's strategy or execution is off course, save for the trouble with search monetization.

Even the acquisition of Del.icio.us ought to cheer Wall Street, though it hurt earnings in the short term. So-called social media, like Del.icio.us's shared lists of Web bookmarks, gives Yahoo! a strategy that's different from Google (Research), and could command fat margins down the road, since the content is generated by users, rather than produced by employees.

In the earnings call, Semel minimized Yahoo's efforts to develop its own content. "We will do a little of that and we will do that to help lead the way and learn what our users are interested in," he said, referring to plans to produce original entertainment. Ultimately, Semel said, Yahoo! wants other media companies to look to it as a distribution partner.

Semel, in other words, is calculating that between licensing and user-generated content, Yahoo! should be able to keep costs down and margins up. Will Wall Street come to cheer Semel's math? One thing's clear: If the ads are up, it will all add up.


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