NEW YORK (CNN/Money) -
Yahoo! has been eager to show investors that it's much more than a seller of Internet advertising. From the look of the company's latest earnings, they may not be looking for any reassurance.
A booming market for online advertising helped to propel Yahoo! to another solid quarter of growth. The Sunnyvale, Calif.-based outfit reported strong fourth-quarter and fiscal year earnings and revenues that beat Wall Street estimates.
Including fees that Yahoo! pays to third-party advertisers, the company's ad sales increased 150 percent year-over-year.
Investors rallied on the news, driving Yahoo (Research) shares up almost 2 percent in after-hours trading Tuesday. The stock is trading near its 52-week high.
Terry Semel, Yahoo's CEO, described 2004 as "phenomenal" and marked by a "tipping point" in the demand for Internet advertising, a medium that not long ago was on life support.
In 2004, Semel said that Yahoo's top advertisers spent considerably more on both its branded and sponsored search advertising services.
"Blue chip marketers are now shifting a larger percentage of their marketing budgets on-line" -- a recognition, he said, that their target customers are spending more and more time online. "Advertising bucks normally follow audiences," he said.
Industry data points to a resurgent online market, part of a broader advertising rebound. Growth in Internet advertising jumped 25 percent, to $7.8 billion, in 2004, according to independent media research analyst Jack Myers. Overall, advertising spending rose 6.3 percent, to $181 billion.
Online ads are now the fastest-growing advertising category, followed next by cable television and magazines. Myers expects Web ads to grow, at 30 percent in 2005 -- a rate that is expected to outpace all other advertising mediums.
Such forecasts, combined with Yahoo's rosy earnings report, bodes well for all Internet companies heavily reliant on advertising. Chief among them is Google (Research), whose share price broke the $200 mark Tuesday, just four months after the Yahoo arch rival went public at $85.
A media giant in the making?
Yet, even as online advertising makes up almost 90 percent of its total revenues, Yahoo! is trying to morph into an entertainment company. Last fall, for instance, the company bought online music store Musicmatch in an effort to grab a piece of the burgeoning market for digital song downloads.
In another diversification move, Yahoo announced this week a deal to provide content services to Verizon Communication's 3.3 broadband -- or high-speed Internet -- subscribers. Yahoo already has a similar deal with SBC Communications, British Telecom in the U.K., and Rogers Cable in Canada.
Yahoo also worked recently with star producer Mark Burnett to build an interactive site for 'The Apprentice' reality TV show.
"You're going to see more and more deals like this happening," said Brian Bolan, an analyst with Marquis Investment Research. "As more people use broadband service than ever before, Yahoo has to develop more broadband content."
Indeed, a senior Yahoo executive boasted, in announcing Wednesday an unrelated deal with a small animation company, that Yahoo's goal is to bring "the next generation of entertainment content to our worldwide audience."
There are signs that Yahoo's move into broader entertainment services is paying off. The fee-based business, which includes items like premium e-mail, personals, and the broadband partnership with SBC, grew 43 percent for the year, to $426 million. The number of subscribers to its premium services grew more than 70 percent, to 8.4 million, the company said.
As impressive as that sounds, Yahoo's fee-based services are now a smaller piece of overall company revenues, 16 percent compared to 20 percent a year ago.
Investors can be forgiven for taking a short-term view of Yahoo's diversification strategy and asking themselves: What's the rush?