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Yahoo profit down by 11%; stocks drop

Yahoo profit down by 11%; stocks drop
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First Published: Wed, Apr 18 2007. 11 49 AM IST
Updated: Wed, Apr 18 2007. 11 49 AM IST
SAN FRANCISCO -- Yahoo's top executives have been focused this year on an effort nicknamed Panama, after the vast canal project undertaken in the face of adversity. It is a major overhaul of the company's search advertising system, intended to increase revenue and close a growing gap with Google, the leader in Internet search.
But it looks as if the good news that investors expected from the project has yet to flow.
The company said on 17 April that net income for the first quarter fell 11 % from a year earlier, while revenue, excluding certain payments made to partners, was up 9 %.
The results were in line with the company's own forecasts, but fell short of analysts' expectations and disappointed investors, who sent Yahoo shares tumbling nearly 8 % in after-hours trading.
"All in all, there didn't seem to be a lot to get excited about," said Derek Brown, an analyst with Cantor Fitzgerald. "There was no tangible proof that Panama is working well or better than expected. There was reference to it, but no concrete evidence in the numbers."
During a conference call with analysts, Yahoo executives made several upbeat pronouncements about Panama's early performance. And they repeated the arguments that the positive effects of Panama on Yahoo's bottom line would begin to be felt in the second quarter and more significantly later this year as the system is rolled out in overseas markets.
Despite investors' reaction, Terry S. Semel, Yahoo's chairman and chief executive, said he was pleased with the company's performance. "The results we put out today were exactly what we expected," he said in an interview. "To us it is a very strong performance."
Project Panama is Yahoo's attempt to place ads alongside search results that users are more likely to click on. Because an advertiser pays only when a user clicks on its ad to visit its site, more clicks translate into more revenue.
Yahoo began rolling out the system in the US on 5 February, and company executives have said it is performing well. At an investor conference this year, Semel said he was "all smiles" about Panama.
Perhaps as a result, investors were hoping that the financial benefits of the system would begin to be felt sooner rather than later. Since the beginning of the year, shares of Yahoo have risen about 25 %, far outpacing gains by Google and most other major Internet companies. Yahoo shares closed at $32.09 on Tuesday, up 48 cents, or 1.5 %, but dropped more than $2.53 in after-hours trading.
"You had so much hype and optimism about Panama around the quarter," said Douglas Anmuth, an analyst with Lehman Brothers. Anmuth said Panama seemed to be on track to deliver on its promise. "It is going to be on a schedule that Yahoo suggested and not on what investors had come to expect in the last few months," he said.
To reap the full benefits of Panama, some analysts say Yahoo needs to increase its share of searches conducted online, which has remained relatively steady over the last year, while Google's has been inching up. During the first quarter, Yahoo accounted for 27.9 % of all searches in the US and Google for 48 %, according to comScore Networks.
On 16 April, Yahoo announced a broad agreement with newspaper companies that could help bolster use of its search technology. Under the deal, more than 260 newspapers in 44 states will carry the Yahoo search box on their websites. The announcement comes after other recent distribution deals, including an agreement for Viacom to use Yahoo as the search engine on several of its online sites.
Yahoo's net income for the quarter was $142.4 million, or 10 cents a share, down from $159.9 million, or 11 cents a share, a year earlier.
Revenue excluding certain payments to partners was $1.18 billion, compared with $1.09 billion a year earlier, a 9 % increase.
Total revenue was $1.67 billion, a 7 % increase over the previous year. Yahoo said its forecasts for the remainder of the year remained unchanged.
Analysts polled by Thomson Financial had expected the company to report a profit of 11 cents a share and revenue of $1.2 billion, excluding the partner payments.
Partnership plans with eBay
On Tuesday, Semel also said that Yahoo had expanded its advertising partnership with eBay to include eBay's payment service, PayPal. Under the deal, merchants accepting PayPal will be highlighted with a special icon when they appear in ads alongside search results, perhaps giving consumers an incentive to click on the ads. The strategy mirrors one that Google has used successfully with its rival payment system, called Checkout.
Semel said that Google's planned acquisition of DoubleClick for $3.1 billion, which was announced last week and represents a move by Google into the graphical advertising business dominated by Yahoo, "does validate Yahoo's strategy for the last few years."
Semel said he had heard and understood concerns from some publishers among DoubleClick's customers that the deal put the company into the hands of a potential competitor. "My guess is that some will be fine and others won't be fine," he said.
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First Published: Wed, Apr 18 2007. 11 49 AM IST
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