Yahoo emerges from gloom to regain its dot-com luster

SAN FRANCISCO -- They're cheering again at Yahoo! Inc.

The dot-com bellwether has recovered $21 billion in shareholder wealth by astutely anticipating the habits of Web surfers -- so much so, in fact, that it now outranks MSN and America Online as the Internet's top destination.

After a mortifying two-year slump, the Sunnyvale, Calif.-based company made a $238 million profit in 2003, impressing disillusioned investors who had written off Yahoo as another Internet has-been.

Rave reviews are pouring in for chief executive Terry Semel, the former head of Warner Bros. who came to the rescue in May 2001.

"It's been a very exciting trip because the results have been so great," said Semel, who still spends weekends at his southern California home.

Stock price tripled

Yahoo's comeback represents another hopeful sign for the high-tech industry. As more people get high-speed Internet connections in their homes and invest in portable devices to stay online, tech leaders like Intel Corp. and Apple Computer Inc. also are reporting higher profits.

After deteriorating from a 2000 high of $237.50 to a 2001 low of $8.02, Yahoo's stock price has tripled since the end of 2002, reaching $48 in mid-January.

The Silicon Valley company's Web sites emerged as the most popular Internet destinations the last two months, surpassing Microsoft Corp.'s MSN and Time Warner Inc.'s AOL for the first time, according to comScore Networks, which tracks Web use. Yahoo had 111 million unique visitors in December.

Yahoo has thrived while Microsoft has directed much of its attention at luring traffic from AOL, said industry analyst Rob Enderle. But that could quickly change if MSN, AOL or another major Web site targets Yahoo.

While MSN and AOL can count on built-in traffic from the subscribers who also pay them for Internet connections, Yahoo has relatively few financial ties to its audience.

"If someone really takes aim and decides to try to hit Yahoo, they could lose a lot of people before they even knew it was happening," Enderle said.

Right place, right time

The threat doesn't appear to worry Wall Street. Analysts expect Yahoo's profits to rise nearly 50 percent this year.

There is one striking similarity to the frothy days before the tech bubble burst in late 2000: Almost everyone seems convinced Yahoo is poised for years of robust growth as the Internet increasingly becomes ingrained in people's lives and more homes get broadband connections.

Yahoo "is a company in the right place at the right time," said analyst Imran Khan of Fulcrum Global Partners.

Much of Yahoo's success reflects a turnaround in Internet advertising, which fell from a $7.6 billion market in 2000 to $6.2 billion in 2002 and rebounded to $6.8 billion last year, according to figures gathered by Fulcrum.

Yahoo's ad revenue has grown substantially since it paid $1.8 billion to acquire Overture Services, a marketing vehicle that charges Web sites to display their links alongside related search engine results.

Other acquisitions in Semel's $2.5 billion buying spree included the online help-wanted site HotJobs and search engine provider Inktomi.

With a soft-spoken manner and no previous Internet experience, the 60-year-old Semel didn't seem like a logical choice to run Yahoo, a fun-loving company filled with brash workers who weren't even born when he first became a Hollywood executive in 1972.

When Semel was brought into replace Tim Koogle, who had led the company almost since its inception, it was such an uncomfortable fit that many analysts thought Yahoo hired Semel simply to tap into his Hollywood connections so the company could be sold to a media giant.

But Semel surprised the skeptics, including many of Yahoo's own employees who wondered what the new CEO had in mind as he quietly studied the company for months after his arrival. As Semel ruminated, Yahoo was on its way to a $92.8 million loss that led to 800 layoffs, half of them on Semel's watch.

Once he grasped Yahoo's strengths and weaknesses, Semel oversaw a methodical makeover that has imposed more discipline on the company, replacing the New Economy's iconoclasm with old-school capitalism.

In its early years, Yahoo's spontaneous approach produced a haphazard mix of popular innovations and experimental features that never made money.

Today, Yahoo carefully measures just about everything it does in terms of revenue per user -- now at 67 cents -- and revenue per employee, which is $375,000.

Semel also expanded Yahoo's subscription base from 200,000 when he arrived to 4.9 million last year.

Many of the new subscribers have been picked up through a partnership with SBC Communications Inc. to sell high-speed Internet connections, positioning Yahoo to sell audio and video subscriptions. Yahoo visitors already pay fees for features such as extra e-mail storage and its popular matchmaking service.

Semel thinks Yahoo may have more than 7.5 million subscribers by year's end, using a strategy some analysts liken to an amusement theme park that constantly finds new ways to encourage visitors to spend money once inside the gates.

By taking over Inktomi as well as the online search engine AltaVista as part of the Overture acquisition, Yahoo gained the leverage it needed to cut ties by April with its former ally turned rival Google Inc.

Yahoo's early $10 million investment in Google is likely to be worth hundreds of millions if, as expected, the online search leader goes public this year. Semel says he hasn't decided if Yahoo will sell the stock to help finance its own future expansion.

"I haven't given much thought to Google's IPO," he said. "We've been too busy taking advantage of all our opportunities around here."