Internet companies seen strong in seasonally weak period

Internet giants are expected to report solid results for the third quarter, thanks to ongoing growth in global online-advertising spending and retail e-commerce sales.

However, reduced Internet use during the summer, when the beach exerts a stronger pull than the computer screen, is expected to be palpable, and for some players act as a drag on revenue and margins.

Moreover, Internet companies' stepped-up internal development efforts and mergers and acquisition activity could add to margin pressure, some analysts said.

Acquisitions have abounded recently, with Yahoo Inc. planning to spend $1 billion (Ђ820 million) on a 40 percent stake in China's Corp. and eBay Inc.'s purchases of and Skype Technologies SA.

Meanwhile, Google Inc. raised more than $4 billion (Ђ3.3 billion) through a secondary stock offering and said some of the proceeds would be used to fund acquisitions.

Industry consolidation and international expansion are goosing already-strong growth powered by consumers' rising use of the Internet. In the United States, consumers spend two-thirds of their waking hours with media, and the Internet is No. 2 after television, according to Ball State University's Middletown Media study.

Both online advertising spending and retail sales online are on double-digit growth paces, significantly outstripping offline rates.

Marketers' rush to find consumers online boosted online-advertising revenue 26 percent to a record $5.8 billion (Ђ4.8 billion) in the first half of 2005, the New York-based Interactive Advertising Bureau reported last week.

Online retail sales, excluding travel, in the United States are expected to grow 23 percent to $110 billion (Ђ90.5 billion) in 2005 from $89 billion (Ђ73.3 billion) in 2004, according to research firm Forrester.

In advertising, Web-search leader Google is expected to beat analyst estimates, as it has done handily each quarter in its short life as a public company. Yahoo is seen as more likely to report results in line with or a bit ahead of expectations.

Google has been the outsized beneficiary of the paid-search advertising boom, thanks to rising market share, an auction method that does a better job of turning queries into money and more exposure to high-growth international markets.

Google handled 37.3 percent of U.S. queries in August, up from 36.1 percent a year ago, according to recent data from research firm comScore Networks. RBC Capital Markets analyst Jordan Rohan estimates Google brings in 30 percent to 40 percent more revenue per search-results page than Yahoo does.

Goldman Sach's Anthony Noto predicts Google will post an 8 percent search-revenue gain in the third quarter from the second quarter, better than overall global search advertising growth of around 5 percent. (RBC reports no conflicts of interest. Goldman has business relationships with Google and Yahoo and beneficially owns 1 percent or more of their common equity.)

Yahoo isn't expected to see the same search-revenue strength, although an effort to improve its auction process and thus its "monetization" of search is expected to help Yahoo close the gap with Google next year.

However, those improvements may simply offset the loss of Yahoo's largest ad customer, Microsoft Corp.'s MSN. The software giant plans to gradually move to its own ad service, which was launched in two international markets last week.

Yahoo's other businesses are doing well. Noto thinks Yahoo could beat third-quarter estimates thanks to stronger growth in "branded" ads, such as banners, and subscriber fees for premium products like e-mail and personals.

Meanwhile, e-commerce sales are on-track to meet or beat expectations, and margin pressures that have been coming from offline retailers' encroachment, comparison shopping sites and search-advertising costs were relatively benign during the quarter, Merrill Lynch analyst Justin Post said.

Analysts think eBay had better-than-expected listings growth in the third quarter, which should lead to some revenue upside for the online auction company. Upside could also come from its recently closed purchase of online shopping comparison site Listings in the United States and Germany are up from a year ago, although concern remains that growth will slow.

At Inc., sales of the latest Harry Potter book should boost revenue, though they could also put a slight crimp in gross margins, Post said, AP reported.

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