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Yahoo's ad system is almost ready

Shares rise 5% on word that Project Panama, its best hope to challenge Google, will start Feb. 5.

January 24, 2007|Dawn C. Chmielewski | Times Staff Writer

Beleaguered investors got a glimpse into Yahoo Inc.'s future -- and liked what they saw.

The company saw its shares jump more than 5% late Tuesday after pronouncing its new advertising system, Yahoo's biggest hope for cutting the profitability gap with rival Google Inc., nearly ready.

The Internet giant reported a 61% drop in fourth-quarter profit, as stock option expenses rose sharply, a smaller drop-off than analysts had expected.

But investors were more interested in a progress report on the much-anticipated search advertising system, known as Project Panama. Yahoo didn't disappoint. After shocking Wall Street in July with a three-month delay, Chief Executive Terry Semel on Tuesday said Yahoo would begin ranking all search-related ads using the Panama technology Feb. 5, a few weeks earlier than previously anticipated.

The new system promises to deliver more targeted ads with search results, an area in which Google's technology holds a big edge. That's significant because advertisers don't pay unless their ads get clicked on. Yahoo expects Panama to begin boosting its profit in the second quarter.

Sunnyvale, Calif.-based Yahoo has undergone growing pains recently, including a major shuffle of top executives in December, as it tries to keep pace with Google and fight off Web upstarts such as MySpace.

"Our goal is to create an advertising platform that takes advantage of Yahoo, which has the largest network of both users and content in the world," Semel said.

Yahoo entered the pivotal search business three years ago, when, after spending $2 billion to acquire search companies, it stopped using Google for results.

Search accounts for the biggest chunk of the $20 billion that advertisers are expected to spend online this year, and Google has captured two-thirds of the paid-search market, according to Internet researcher EMarketer.

American Technology Research analyst Rob Sanderson said the financial implications of getting search advertising right were nothing short of huge. He estimated that Google generated revenue from about 65% of its searches. If Yahoo could be as efficient as its adversary, he said, its operating cash flow would jump 75%.

"That's a big, big, big number," Sanderson said.

Yahoo has worked on Panama for 18 months, seeking parity in making money on Internet searches. Semel said Panama would finally give Yahoo advertisers a flexible platform that let them reach popular Yahoo sites as well as those of its advertising partners, including EBay Inc.

"This is a big piece of our future," Semel said. "The reason we reorganized our company was to accommodate this, to give us the ability to have one group that looks at our audience and our content and another group which looks at every which way of how you monetize it."

Advertisers such as Telogis Inc., a Costa Mesa company that makes vehicle-tracking hardware and Web-based software, are eagerly anticipating Yahoo's ability to deliver different Web ads to users depending on where they are.

"If there are local businesses that want to target a city in Orange County, it shuts off everyone else," said Veronica Muth, Telogis' marketing coordinator, who is hoping Panama will also improve the quality of business leads.

Yahoo said net income was $269 million, or 19 cents a share, compared with the year-earlier quarter of $683 million, or 46 cents. Fourth-quarter revenue was $1.7 billion, up 13% from a year earlier.

Yahoo announced its earnings and ad system update after the market closed. In regular trading, its shares fell 46 cents to $26.96. They climbed as high as $28.53 in after-hours trading.

Chief Financial Officer Susan Decker told analysts she expected Panama to begin contributing to Yahoo's revenue late in the second quarter. She estimated first-quarter revenue would be as high as $1.2 billion. Analysts said investors were clearly relieved that Yahoo had announced a formal launch date for its new advertising platform.


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