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Internet Cos. Seen Posting Earnings Growth

Posted on: Friday, 13 January 2006, 18:00 CST

NEW YORK - U.S. Internet giants are expected to report strong revenue and profit growth for the final quarter of 2005, driven by the ongoing shift in advertising and retail dollars to the Web and goosed by the holiday rush.

Both online advertising spending and e-commerce sales continue to leap ahead at double-digit percentage rates, significantly surpassing growth in the offline world.

The result, analysts say, should be strong growth for Internet bellwethers Google Inc., Yahoo Inc., eBay Inc. and Amazon.com Inc.

Goldman's Anthony Noto said in a note to investors that Google's net revenue could be anywhere between 20 percent and 30 percent higher than in the September quarter, versus his official 20 percent forecast.

Anticipation of strong results has driven Google's stock to new highs. It reached an all-time high of $475.11 on Wednesday, marking a 175 percent rise from its 52-week low of $172.57, set March 14.

The Web search giant's remarkable growth trajectory has proven tough to predict, particularly without the aid of company forecasts (which Google famously declines to provide).

The company's ascent has been driven not only by rapid adoption of search marketing but also by improving revenue per search and overseas expansion.

Its expected efforts to step up profits from new products, particularly listing service Google Base, should add another tricky element to the mix in the coming year.

"Google is an iconic company that, like Microsoft and eBay before it, has defined a new and vital industry," Piper Jaffray analyst Safa Rashtchy said recently in a note to investors.

"It is singularly well-positioned to benefit from the growth of online advertisement and search" and go beyond that with "innovative new products that have redefined the consumer Internet experience."

Yahoo, which on Tuesday kicks off the reporting season for Internet companies, also is expected to report strong results, albeit likely again overshadowed by high drama at Google.

Yahoo's search business isn't growing as fast as Google's; Noto puts its sequential growth rate at 13 percent, compared with 20 percent to 30 percent for Google. Yahoo isn't seeing Google's market-share gains, and it isn't as good at squeezing money out of search queries as its rival.

But Yahoo is expected to report some improvement in search revenue, its product innovations and relationships with Internet-access providers are expected to lift overall visitor numbers and subscription fees, and it should be an outsized beneficiary of growth in display, or "branded," ads, an area where Google is essentially absent.

"Yahoo's branded business should benefit from a combination of volume and pricing growth, driven by the holiday shopping period and by continued migration of ad dollars online," Jefferies & Co. analyst Youssef H. Squali said.

Noto says non-search ads could produce revenue that beats average analyst expectations for Yahoo this quarter. He recently raised his forecast to 25 percent or more quarter-over-quarter growth from an earlier estimate of 20 percent.

E-commerce companies also are expected to display strong growth, although analysts are concerned stiffening competition could pressure margins for some players.

E-commerce sales have been expanding at a rate of 25 percent to 30 percent per year, according to Piper Jaffray. And holiday sales rose some 30 percent from last year to about $30 billion, according to a Goldman Sachs survey. But competition pushed e-tailers to spend heavily on marketing - good news for Yahoo and Google - and they're feeling pressure to step up investment in their sites.

Analysts are predicting a strong showing for eBay, the online auction giant, amid signs of considerable listings strength.

RBC's Jordan Rohan estimates listings ended up 19.5 percent compared with the September quarter, better than his forecast of 15 percent, suggesting some $30 million in potential revenue upside.

He thinks margin pressure abated for eBay this quarter, but called Skype, the Internet calling company it acquired recently, a remaining "wild card."

Squali also touted listings strength, arguing it was evident in the U.S. as well as in the key German and British markets, improving the chances eBay will lift 2006 estimates.

Analysts, however, are more worried about Amazon, one of the most expensive stocks in the Internet sector.

"Amazon is widely expected to post strong (fourth-quarter) revenue, but margins may be more of an issue," RBC's Rohan wrote. "Intense price competition, technology investments and increased shipping cost subsidization may create an uninspiring 4Q report."

JPMorgan's Imran Khan noted that Amazon grew 23.3 percent during the first nine months of 2005, a bit slower than the overall market's 25.3 percent rate, suggesting it's losing share.

Amazon is seeing more vigorous competition from traditional retailers, comparison-shopping engines and smaller rivals leveraging search engines to woo bargain-hunting consumers.

"We believe increased competition from large-cap Internet players such as eBay and Google will force Amazon to increase investments in technology, which we believe will lead to margin contraction," Khan wrote.

Company/Thomson Financial Estimate/Net Year-Ago/Reporting Date

Yahoo Inc. 17c 25c Jan. 17

eBay Inc. 22c 15c Jan. 18

VeriSign Inc. 26c 43c Jan. 26

Google Inc. $1.76 71c Jan. 31

Amazon.com Inc. 21c 82c Feb. 2

AQuantive Inc. 14c 10c N/A

EarthLink Inc. 21c 23c N/A

IAC/InterActiveCorp 46c -7c N/A

United Online Inc. 27c $1.26 N/A

ValueClick Inc. 12c 16c N/A

(The Thomson Financial estimate and year-ago net may not be comparable due to one-time items and other adjustments.)

Source: Associated Press/AP Online

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