Yahoo Disappointing 1Q Drags Down Stock

Investors were falling in love with Yahoo Inc. again until the Internet icon's disheartening first-quarter results ruined the mood.

With both its profit and revenue missing analyst estimates for the first three months of the year, Yahoo left Wall Street wondering how much longer it will take the Sunnyvale-based company to regain its financial momentum after stumbling through much of 2006.

Reflecting hopes for a more rapid comeback, Yahoo's stock price had surged by 26 percent so far this year heading into Tuesday's earnings announcement.

But the optimism quickly faded after Yahoo revealed its first-quarter profit had fallen by 11 percent to $142.4 million, or 10 cents per share. That compared with net income of $159.9 million, or 11 cents per share, at the same last year.

The results were a penny below the average earnings estimate among analysts surveyed by Thomson Financial.

The letdown zapped Yahoo's stock, which plummeted $2.53, or 7.9 percent, in after-hours trading Tuesday. Before the disappointing news, Yahoo shares had gained 48 cents earlier in the day to close at $32.09 on the Nasdaq Stock Market.

"When you sift through everything, there is not a whole lot to get excited about right now," said Cantor Fitzgerald analyst Derek Brown.

Revenue for the period rose 7 percent to $1.67 billion.

After subtracting advertising commissions, Yahoo's revenue totaled $1.18 billion. That figure fell about $25 million shy of the average analyst projection.

ThinkEquity Partners analyst Stewart Barry said he doubts Yahoo's recent sluggishness will persist. "We feel the first quarter is going to be the trough for the company," he said.

The first-quarter downturn still may renew concerns about Yahoo's ability to compete against Google Inc., whose Internet-leading search engine propels the Web's most lucrative advertising network.

Through March, Google held a 48 percent share of the U.S. search market compared with 27.5 percent for Yahoo, according to comScore Media Metrix.

The balance of power will likely come into even sharper focus Thursday when Mountain View-based Google is scheduled to report its first-quarter results.

Yahoo has pledged to narrow the gap with its rival this year with the recent introduction of a new marketing platform -- dubbed "Panama" -- that is supposed to do a better job of distributing ads that will spur revenue-generating clicks. Meanwhile, Google is bolstering its arsenal with its planned $3.1 acquisition of a major online advertising placement service, DoubleClick Inc.

Although Yahoo's new ad system rolled out in the United States in early February, the company's management has repeatedly advised investors that the financial benefits are unlikely to become evident until the second half of this year.

Investors nevertheless appeared convinced Yahoo might get an early lift from the Panama platform.

Yahoo can't afford to too many more disappointments, Brown said. "There is clearly a lot riding on the success of Panama."

Panama's introduction was delayed last year, contributing to a 35 percent decline in Yahoo's stock price that wiped out about $20 billion in shareholder wealth. The lackluster performance culminated in a management shake-up that included the departure of Yahoo's chief operating officer, Dan Rosensweig.

Now, some analysts believe Yahoo Chairman Terry Semel could lose his job as chief executive officer if Panama doesn't accelerate the company's earnings growth. Semel, who is approaching his sixth anniversary as Yahoo's CEO, didn't sound worried during an interview Tuesday.

"I feel really good," he said. "The results are great and we are very happy with what we have done so far."

Besides Panama's long-awaited debut, Yahoo has also raised Wall Street hopes by negotiating potentially lucrative advertising partnerships with Viacom Inc. and the publishers of 264 U.S. newspapers.

Yahoo on Tuesday touted another new partnership with PayPal, an online payment service owned by Internet auctioneer eBay Inc. To help counter Google's heavy promotion of its own "Checkout" payment service, Yahoo will begin featuring small shopping cart icons alongside the ads of about 2,500 merchants who accept PayPal. The financial terms of Yahoo's PayPal partnership weren't disclosed.


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