The Day Ahead: Yahoo! ducks online ad issue

Yahoo! executives did their best to allay fears that the dot-com shakeout won't hurt the Web giant's advertising prospects, but they raised more questions than they answered and largely ducked the issue.

Yahoo! reported a strong second quarter, earning 12 cents a share on sales of $270m to top the most optimistic revenue projections.

Analysts, however, wanted to hear about the financial health of Yahoo!'s customer base, and how an online ad slowdown would affect future growth for the portal and the industry. Investors and analysts are worried with good reason. As dot-coms go under, so do the big ad budgets. NBCI partly blamed dot-com woes for its profit warning, and DoubleClick has dived on advertising concerns.

Instead of straight answers, Wall Street got a load of fluff. Get used to it. You're likely to hear the same spiel from America Online, the other Internet giant that's immune from the dot-com cash crunch.

Yahoo!'s response on its earnings conference call was simple: we're big and advertisers love us. Yahoo! chief financial officer Susan Decker said the company doesn't disclose the financial details of its customers for competitive reasons. Besides, "the definition of a dot-com is increasingly gray," she said.

"It's fair to say 'financially questionable' clients account for less than ten percent of revenue," said Decker. A quarter of Yahoo!'s revenue comes from business services and international advertising, Decker said, adding that those segments do not have "meaningful exposure" to Internet companies.

Decker went on to say that the company did an exhaustive review of its customers' financial health. That exhaustive review sounded like it was based on Barron's infamous list of dot-coms and their cash burn rates.

The obvious follow-up question to Decker's response was: "What exactly is 'less than ten percent?' Is that 9.5 percent or two percent?" In any case, it could be a big deal for a company that some critics argue is overvalued anyway. If Yahoo! would have lost 9.5 percent of its second quarter sales because of those "financially questionable" customers, it would have merely met analysts' lowball sales target.

Yahoo! had 3,675 customers at the end of the quarter, up modestly from the first quarter. Some dot-com customers are asking to renegotiate deals, but no more than usual.

Decker's not-so-direct answer was followed up by chief executive Tim Koogle, who was optimistic. Koogle should be bullish -- Yahoo! put up great metrics across the board.

Koogle said the company will be a consolidator and the dot-com shakeout is healthy (doesn't every exec say that?). Advertising will be even more concentrated among the top players as dot-coms croak. "The fundamentals haven't changed," said Koogle. However, he didn't provide much insight to the industry.

After Koogle, it was chief operating officer Jeff Mallett's turn to be cagey. Mallett said the company was "not immune to industry changes", but immediately gave statistics indicating Yahoo was above the dot-com fray.

Mallett rattled off Yahoo!'s metrics -- 156 million unique users, 680 million page views a day in June and 13 million hours of streamed audio and video -- to prove the company was immune to the dot-com fallout. Mallett said Yahoo! hasn't opened up its 2001 ad inventory for sale yet, but will start selling it in September and October. That ad inventory auction -- and second-tier portals -- may reveal more about the dot-com fallout.

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