July 19, 2006

For the results of its second quarter, Yahoo did meet analysts' expectations with a net profit of $164 million, but the company said it postponed the introduction of a new Internet advertising idea, reducing hopes for substantially faster earnings growth later in 2006.

On the Nasdaq stock exchange, shares of Yahoo dropped almost 14 percent on yesterday's news, released just after markets closed.

Yahoo is currently the owner of the world's most trafficked Web site and it said it earned $164.3 million, or 11 cents a share in the three months ended June 30.

This represents a 78 percent decrease from the second quarter of last year, when the company earned $754.7 million, or 51 cents per share.

The subtantially reduced numbers are deceiving since Yahoo made a $552 million profit in the second quarter of 2005 by selling its remaining stake in one of its biggest rivals, online search leader Google Inc.

New accounting rules also required Yahoo to deduct the cost of employee stock options from its earnings, something it didn't have to do in 2005.

Revenue for the 2nd quarter totaled $1.58 billion, a 26 percent increase from $1.25 billion in 2005. After subtracting the commissions Yahoo paid to other Web sites (TAC) in its advertising network, revenue stood at $1.12 billion, up 28 percent from last year.

Yahoo's stock price dropped almost immediately after the second-quarter numbers came out because investors had been hoping the results would better the average estimate of 11 cents per shares among 34 analysts polled by Thomson Financial.

The backlash intensified during an analyst conference call when Yahoo management revealed a much-anticipated change in its formula for displaying ad links will be delayed by at two or three months.

Investors have been eagerly awaiting the new ad platform, hoping the improvements would enable Yahoo to do a better job displaying short ads for Yahoo's audiences to click. The clicks on those ads, which typically appear as text on the top and sides of Web pages, are critical because they trigger commissions for Yahoo and its partners.

Google's financial growth during the past two years has outstripped Yahoo's partly because it had developed a better formula for determining which ads to display alongside search results - an advantage that even Yahoo Chairman Terry Semel conceded.

"We are not monetizing as well and it is costing us a lot of money," Semel said during an interview.

Yahoo now doesn't expect its new approach to be completely available until early next year. In May, Yahoo expected to start rolling out the changes in the third quarter and have the entire process completed in the fourth quarter.

Semel said Yahoo didn't want to risk a hiccup as advertisers ramped up their spending for the holiday season.

"We feel terrific about (the new formula) and know the importance of it," Semel said. "There is nothing wrong or nothing we are upset about."

Investors, though, were clearly agitated. Yahoo's shares rose 40 cents before the report to close at $32.24 on the Nasdaq Stock Market. But then it plunged $4.44, or 13.8 percent, to $27.80 in extended trading, wiping out $6.5 billion in market value.

Yahoo's second-quarter performance also appeared to dampen hopes for Google, which is scheduled to release its results Thursday. After falling $4.84 to close at $403.05 in regular Nasdaq trading, Google's shares retreated by $10.05, or 2.5 percent, in the after-hours session.

Although it boasts the Internet's largest audience, Yahoo has been losing favor among investors as Google has widened its lead in the lucrative search market and News Corp.'s youth-oriented MySpace.com has emerged as a hip place for the next generation of Web surfers to hang out.

Through June, Google held a 44.7 percent share of the U.S. search engine market, up from 36.9 percent at the same time last year, according to comScore Media Metrix. Yahoo ranked second with a 28.5 percent share, down from 30.4 percent a year ago, comScore said.

Meanwhile, MySpace.com has been threatening to supplant Yahoo as the most viewed site on the Web.

Even before Tuesday's late slide, those worries had already helped slice off nearly a fifth of Yahoo's share price since the start of this year.

Wall Street's negative sentiments didn't prevent Yahoo Chairman Terry Semel from celebrating the second-quarter results.

"It's exciting to see the next generation of Yahoo evolve," Semel said during the conference call. "We believe the next phase of the Internet is likely to be even bigger and more exciting than the past decade."

Source: Mercury News