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Yahoo! Proves Independence Can Work With Release of Strong Earnings Report

Fox Market Wire
Yahoo! executives balked at the idea of inking a mega-deal, similar to the merger their rival America Online announced with Time Warner.

And on Tuesday, the Santa Clara, Calif.-based company gave proof that their independent strategy may be working. Late in the afternoon, Yahoo! reported strong fourth-quarter profits that beat Wall Street estimates. The Internet portal also announced a 2-for-1 stock split effective Feb. 14.

"We believe our continued best-value proposition is to continue to have an independent distribution platform that allows us to be fluid and put in the right things that consumers want," said Yahoo!'s president Jeff Mallett.

However, analysts continue to point to Yahoo!, when asked which company might feel most pressured on the heels of the AOL-Time Warner deal.

Mallett, however, said he did not see the merger as a serious competitive threat, and implied that Yahoo! saw no need to respond by going out and acquiring a media empire of its own.

"You can go back and look at some of these other deals (between Internet and media companies)," and they have not necessarily panned out," he said.

"We got all excited last year when Disney said they want to acquire Infoseek, and that hasn't been a homerun, to say the least," Mallett said, referring to one of the most celebrated media-Internet combinations. "AOL will have tough choices on how aggressively to offer house brands and content and eliminating choice."

Yahoo!, one of AOL's biggest rivals, has a long-standing policy of connecting users to the broadest array of content on the Internet, but owning virtually none of it.

Many critics have wondered how this "content agnostic" policy would stand up, if AOL began offering the wide array of Time Warner properties exclusively to its subscribers.

Mallett said he doubted AOL could or would make use of Time Warner's content in such a way. He said most Time Warner properties — which include CNN, Warner Bros. Entertainment properties as well as magazines like People and Fortune — are already out on the Internet, available to all consumers.

To make that content proprietary, Mallett said AOL would probably have to bump some of its other content providers, which would in effect limit the choice of its own customers as much as its competitors.

Mallet's comments came as Yahoo! announced that its net income rose to $44.7 million, or 15 cents a share, from $3.8 million, or 1 cent a share the same period a year ago. Excluding amortization and goodwill costs, earnings were $57.6 million, or 19 cents a share — 4 cents above analysts' estimates.

The company's earnings were released after the close of regular trading. Yahoo's stock finished down $38.68 3/4, or 8.9 percent, at $397.37 1/2 on the Nasdaq Stock Market.

Yahoo! chief executive Tim Koogle said in a conference call to analysts that the company does not need to look outside cyberspace for growth. Yahoo! instead could benefit from the AOL-Time Warner deal because AOL has promised to open Time Warner's cable pipeline to competitors, he said.

At least some analysts agree.

"(A purchase) is not crucial for them to be able to grow and could, in fact, be a hindrance in the future since we don't know whether cable will be the dominant platform for Internet access," said U.S. Bancorp Piper Jaffray analyst Safa Rashtchy.

The earnings report didn't seem to assuage investors, however, who pushed shares down as low as $368 in after-hours trading.

Lehman Brothers analyst Brian Oakes noted investors had expected revenues to rise more sharply in the fourth quarter, traditionally one of Yahoo!'s strongest.

Revenue for the quarter rose to $201.1 million from $91.3 million as the company collected higher advertising fees and saw increased business from e-commerce during the holiday shopping season.

"Wall Street always puts companies on a treadmill and keeps turning up the speed slowly but surely, so there's some concern about the lack of an even bigger revenue rise to the upside," Oakes said. "Still, while we all look for much higher expectations out of the company, it was an extremely strong report ... and this company is still one of the leaders on the Internet."

During December 1999, Yahoo! reported its global audience grew to more than 120 million unique users, double the 60 million users it served in the same period of 1998. The number of unique users a week averaged 3 million a week.

Also during December, Yahoo!'s traffic increased to an average of 465 million page views per day, a figure sharply higher than analyst estimates of 424 pages views per day and nearly three times the average of 167 million page views per day in December 1998.

The figures are significant because about 30 percent of Yahoo! revenue stream comes from money its charges companies for slotting and placement when users are conducting searches for a particular item and by taking a percentage of each sale.

Yahoo! accounts for 56 percent of all search engine referrals, five times its nearest competitor, and up from 38 percent at the beginning of 1999, according to Media Metrix, which measures Internet traffic.

The gains come at the expense of such portals as Lycos, AltaVista, Go! and Excite. Microsoft and AOL also have gained market share, but remained well behind Yahoo! through November, Media Metrix reported.

For the year, net income rose to $61.1 million, or 20 cents a share, compared to a net loss of $12.7 million, or 6 cents a share in the year-ago period. Net revenue rose to $588.6 million, from $245.1 million.

Reuters contributed to this report

The Associated Press contributed to this report

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