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Yahoo Profits Down, Stock Follows

By: David Utter

Not only did the company experience a drop in sales and earnings, the planned upgrade to its search advertising system has been pushed back to the first quarter of 2007.

Yahoo Profits Down, Stock FollowsThe day after Yahoo (YHOO) announced upgrades to its Finance pages, CEO Terry Semel had to deliver some awful truth to investors with the company's earnings announcement.

Quarterly revenue grew to $1.576 billion for the second quarter of 2006, a year-over-year increase from last year's $1.253 billion. Excluding traffic acquisition costs (TAC), revenues were $1.123 billion for the period, compared to $875 million in the second quarter of 2005.

Yahoo's net income figures appeared to take investors by surprise. The company saw $164 million in net income, or 11 cents per share. In 2005, that figure was $755 million, which included gains of $552 million based on the sale of certain investments and settlements.

Yahoo said that without those gains, second quarter 2005 net income would have been $152 million, or 10 cents per share.

But the revenue figure bothered investors greatly. Analysts surveyed by Thomson Financial had estimated $1.14 billion excluding TAC for the second quarter 2006. One analyst cited in a Bloomberg report hinted Yahoo's numbers could be a harbinger of Google's (GOOG) report coming tomorrow:

"Yahoo's numbers, while not a clear read-through for Google, suggest that investor expectations for Google are stretched,'' said RBC Capital Markets analyst Jordan Rohan in New York, who rates both companies "outperform'' and doesn't own them. "It's disappointing on many levels."

Yahoo closed at 32.24, up 40 cents for the day. After-hours trading was another story, as ECN reported Yahoo had dropped 4.41 to 27.83 after the company announced its numbers.

Continued testing of Yahoo's new ad system, called Project Panama, apparently will be needed before the company can make it available to its advertiser clients. The disclosure prompted some of the analysts on the conference call to push COO Dan Rosensweig about the delay, but he did not elaborate on what might be causing the delay.

The new system will be key for Yahoo to improve its paid search business, a segment that Google dominates due to better relevance in its contextual search advertising. Yahoo has been testing Panama outside the US, and was expected to unveil it in time for the US holiday shopping season.

Yahoo has consistently held to the position that they would launch Panama when it is ready to go. But the delay could be a real problem, as CFO Susan Decker conceded during the call that Yahoo has lost search advertising market share to competitors.


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