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Yahoo's 83% Profit Growth Fails to Appease Wall Street

January 18, 2006|Chris Gaither | Times Staff Writer

SAN FRANCISCO — A penny proved costly to Yahoo Inc. Tuesday.

The company reported that fourth-quarter earnings soared 83%. Immediately after, its stock price plunged more than 13% because the profit was 1 cent a share less than Wall Street expected and analysts didn't like the company's outlook for this year.

Yahoo, the most-visited Web portal, said net income climbed to $683 million, or 46 cents a share, on $1.5 billion in revenue, thanks to strong online ad sales and a large accounting benefit from a joint venture with Alibaba.com, a Chinese Web search engine.

But profit, revenue and 2006 forecasts fell short of Wall Street's expectations as the Sunnyvale, Calif.-based company said it was having to spend heavily on technology and marketing to keep pace with rivals such as Google Inc. That sent Yahoo shares plummeting in after-hours trading to $34.70, their lowest level since mid-October, from $40.11.

"The primary factor is competition with Google," Guzman & Co. analyst Philip Remek said.

The punishment doled out by investors is symptomatic of the high standards Internet companies are being held to on Wall Street. Anything less than torrid growth that at least matches, and preferably exceeds, expectations is unacceptable.

Yahoo dragged down the shares of other major Internet names. Google, which rose 86 cents to $467.11 in regular trading, slumped to $451 after hours on concerns that it might show a slowdown when it reports earnings Jan. 31.

Yahoo helped lead the technology stock sector's powerful new year's rally, zooming nearly 11% in the first five trading sessions of 2006 to a five-year high of $43.42 on Jan. 9. But the stock began falling last week ahead of Tuesday's earnings.

"Notwithstanding all of the excitement and enthusiasm around the Internet advertising segment, and I think there's good reason for it, it doesn't ensure that these stocks are going to go up," said Scott Kessler, an analyst at Standard & Poor's.

Yahoo's fourth-quarter profit compared with $373 million, or 25 cents a share, in the same period in 2004. Revenue rose 39% from a year earlier. Excluding the Alibaba gain and other one-time items, Yahoo earned 16 cents a share, a penny shy of the consensus expectations of 34 analysts polled by Thomson Financial.

In a conference call, Yahoo executives said they were capturing a bigger piece of the booming online ad market.

But Safa Rashtchy, analyst with Piper Jaffray, questioned how that could be the case when growth rates dipped notably compared with the third quarter, and Yahoo's 2006 forecast suggested even further slowing.

Sue Decker, Yahoo's chief financial officer, said she expected that the company would have to spend more to attract Web traffic in 2006. Yahoo is also bracing for the loss of Microsoft Corp. as an advertising partner. Microsoft had placed ads brokered by Yahoo on its websites, but is dropping Yahoo in favor of its own ad-placement technology. Revenue from Microsoft is expected to drop to about $25 million from $75 million in the first half of the year, Decker said.

On the positive side, Yahoo Chief Executive Terry Semel said the company attracted 12.6 million paying subscribers to its services, a 50% jump. Fee-related revenue rose 38% to $185.7 million. Online advertising revenue increased to $1.3 billion from $942.9 million.

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