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Yahoo Results Disappoint; Shares Drop

The Web portal is also stung by an announced delay in its new system for search advertising.

July 19, 2006|Chris Gaither | Times Staff Writer

Yahoo Inc. started the technology industry's summer earnings season Tuesday with a thud: The online giant's shares sank 14% after it missed revenue expectations, barely hit Wall Street's profit target and issued a tepid forecast.

Shares began sliding in after-hours trading immediately after the second-quarter results were announced. They plunged when, as one analyst put it, Yahoo "dropped a bomb" on investors by announcing that it was delaying the release of a revamped system to generate more ad revenue from the searches conducted by users.

The system, a key element of Yahoo's effort to narrow the profitability gap with rival Google Inc., is now expected in the fourth quarter instead of the third.

"Google's not exactly standing still, so anytime you delay things relative to your archcompetitor, it's not a good thing," Global Crown Capital analyst Martin Pyykkonen said.

Yahoo's lackluster earnings raised concerns about results from other tech giants this week, including EBay Inc., Google, Microsoft Corp., Intel Corp. and Apple Computer Inc. All except Intel, which was flat, saw their shares fall after Yahoo's announcement.

Yahoo shares sank to $27.83 after hours, knocking $6.2 billion off the company's market valuation. In regular trading, they had closed up 40 cents at $32.24.

Revenue rose 26% over the same quarter last year to $1.58 billion on the strength of marketers' increased spending on banner ads and other display advertising. Yahoo's advertising and listings revenue reached $1.39 billion, up 27% from the comparable period last year. Subscription services and other fees generated $189.6 million, a 20% increase.

But growth wasn't what investors had come to expect from Yahoo. People generally spend less time in front of the computer during the spring and summer. Fast growth at Yahoo and other big Internet companies masked the seasonal slowdown, but it's becoming more pronounced as the companies mature.

Yahoo reported profit of $164 million, or 11 cents a share, compared with $755 million, or 51 cents, a year earlier.

The 78% drop in net income was largely attributable to unusual circumstances. Yahoo sold $552 million in Google stock in the second quarter of 2005, making for a tough comparison this year. Also, new accounting rules required all companies to list stock options as an expense this year.

For the full year, Yahoo maintained its forecast for revenue, minus commissions paid to website operators that run its ads, of $4.6 billion to $4.85 billion, falling just short of analysts' predictions.

One reason was the delay of the new search-advertising system, which, as recently as May, Yahoo executives had assured analysts was on track.

Sunnyvale, Calif.-based Yahoo is the No. 2 search engine, behind Google. Yahoo conducted 28.5% of all U.S. searches in June, down from 30.4% in the same period last year, according to ComScore Networks, a market research firm. Google gained share during that time, rising to 44.7% of all searches, up from 36.9%.

But Google has become especially good at delivering relevant ads with search queries, which makes them more profitable -- search ads generate revenue only when they're clicked on. Yahoo acknowledges that it's lagging behind its rival and says it has been working on a system that promises to make searchers more likely to click on ads.

Yahoo executives said the system needed more testing. They expect to open it to advertisers in the fourth quarter, then start ranking advertising results the new way in the first quarter, pushing back any financial benefit to 2007.

"We wanted to make sure we did it right," said Dan Rosensweig, Yahoo's chief operating officer. "We don't manage the company for a particular quarter."

American Technology Research analyst Rob Sanderson said news of the delay came as "a bomb," especially after the uninspiring financial performance.

"The Street is very focused on 'When can you start getting the revenue per search more in line with Google?' " Sanderson said. "Monetization is really where Google is blowing it out."

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