Analysts say Yahoo! must work hard to maintain year-on-year growth

Yahoo! may have posted its first profit since the third quarter of 2000, but analysts are still cautious.

Yahoo! may have posted its first profit since the third quarter of 2000, but analysts are still cautious.

Merrill Lynch analyst Justin Bauldaf cut his recommendation on Yahoo! stock, saying new business drove the profit. "Basically, [Yahoo!] boosted earnings with short-term contracts while the core of the business is still suffering," Bauldaf said.

Yahoo! announced that it had posted revenue of $225.8m (£146m) for the second quarter, a 24% increase over the $182.2m it posted for the second quarter of 2001. The company reported a profit of $21.4m (£13.8m), or three cents per share, for the quarter, compared with a $48.5m loss for the same period last year.

The company's earnings before interest, taxes, depreciation and amortisation (EBITDA) totalled $36.1m (£23.3m), compared with a $38m EBITDA loss reported for the same period last year.

"We are very pleased that our efforts have resulted in both strong top-line and EBITDA growth this quarter despite a tough overall economic environment," Yahoo! chief executive officer and chairman Terry Semel said. "We expect to continue to deliver strong results and profitable growth through the remainder of the year."

Despite Bauldaf's misgivings about the earnings numbers, analyst Fred Moran at Jefferies & Company was less pessimistic about Yahoo!'s future. But he noted that without its business deals with and Overture Services, Yahoo! would not have made a profit.

Moran said the good news is that these deals indicate that Yahoo! is getting away from its traditional revenue driver - online advertising. But, he said, if Yahoo! cannot grow revenue from those deals, it will continue to have problems.

Bauldaf said he has serious doubts about Yahoo!'s ability to do just that and wondered what the company would do in a year when these deals reach their "anniversary".

"It's going to be a lot harder to drive growth on a year-to-year basis," Bauldaf said.

Other market analysts were more upbeat. Morgan Stanley analyst Mary Meeker said Yahoo! has consistently met is earnings estimates, even in times of loss. Doing so demonstrates "that management has gotten its hands around the business and that the business has become more predictable", Meeker wrote in a 28-page report.

She also wrote that she has confidence in Yahoo! because "we continue to be believers in the long-term outlook for Internet advertising".

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