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Yahoo! beats estimates

From strength to strength: Yahoo!'s success goes on, surpassing expectations.
From strength to strength: Yahoo!'s success goes on, surpassing expectations.

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NEW YORK (CNN/Money) -- Yahoo! said Wednesday that earnings more than doubled in the third quarter due to strength in its bread-and-butter Internet advertising business, surpassing analysts' forecasts.

The Internet media company reported net income of $65.3 million, or 10 cents a share, compared to net income of $28.9 million, or 5 cents a share, a year earlier.

Analysts were expecting the company to post earnings of 9 cents a share, according to earnings tracker First Call.

Sales jumped 43 percent to $357 million, well ahead of the Wall Street consensus estimate of $338 million.

Shares of Yahoo! initially surged 3 percent to $39.95 in after-hours trading soon after the report was released but cooled off a bit after the initial euphoria. The stock was up about 1.5 percent after-hours at the beginning of the company's analyst conference call.

The stock fell 14 cents in regular trading on Nasdaq Wednesday but had surged more than 10 percent in the first few days of October, in anticipation of the report.

Yahoo! is up more than 135 percent year-to-date as investors have embraced Internet stocks due to strong growth. So the muted response after-hours may have been due to extremely high expectations, i.e. Yahoo! not beating by more than a penny per share.

Still, Steve Weinstein, an analyst with Pacific Crest Securities, said the report was very positive and that in particular, Yahoo! showed strong growth in its core business of attracting Internet advertising.

Healthy growth

Revenues from Yahoo!'s advertising business, which it calls Marketing Services, accounted for nearly 70 percent of Yahoo!'s total sales. Revenue increased 48 percent from a year ago, to $245.1 million.

Yahoo!'s two other business lines, fees and listings, also showed healthy levels of growth.

Yahoo!'s fee-based business, which includes things like premium e-mail, personals and a DSL partnership with Baby Bell SBC, increased 38 percent to $79.4 million. Revenue from Yahoo's listing business, made up mainly of resume and career search site HotJobs, increased 26 percent to $32.4 million.

The company has been trying to get more customers to sign up for paid services, in order to lessen its reliance on Internet advertising. To that end, Yahoo! CEO Terry Semel said during the conference call that the company ended the third quarter with 4.2 million fee- paying customers, up from 1.6 million a year ago.

Yahoo! also said that sales for its fourth quarter, excluding traffic acquisition costs associated with the recent purchase of sponsored search company Overture Services, would be between $390 million and $430 million.

Excluding the traffic acquisition costs, Yahoo! said that revenue would be between $462 and $502 million. The current consensus estimate for the quarter is $374 million, according to First Call.

Traffic acquisition costs refer to the amount of money that Overture, which provides sponsored search listings to other Internet companies, such as Microsoft's MSN, shares with its affiliates.

Sponsored searches allow advertisers to have their ads tied to specific keywords.

But there have been some questions about how much longer Microsoft would maintain a business relationship with Overture since Microsoft is bulking up its efforts to compete against Yahoo! in the search arena. Microsoft has the right to terminate its contract with Overture upon a change of control in the company.

Semel said, however, that he was hopeful Microsoft would remain an Overture customer.

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