September 20, 2006

Yesterday, Yahoo's board said it expects third-quarter revenue to be at the lower half of its forecast range due to a cooling off period from two of its largest advertising divisions, sending its stock down as much as 12.9 percent.

Yahoo's news sparked worries over other Internet companies that rely mostly on advertising, including Internet search leader Google. The news also helped send U.S. stocks lower as some analysts questioned whether Yahoo's comments signaled a slow-down for consumer demand that could hit the overall economy.

On Sep. 18, Dow Jones & Co. cut its 3rd quarter forecast due to softer advertising at the Wall Street Journal. Yahoo has seen a little bit of weakness in the last few weeks in auto and financial services advertising, CFO Susan Decker told investors at a Goldman Sachs media conference.

"It's now a new trend. It's been two to three weeks and we don't know yet if it's an initial indicator of a broader slowdown," Decker later told reporters at the conference. "We're seeing it enough to say something," she said. "I don't want to overplay it either."

Overall, Yahoo expects to deliver 3rd quarter revenue excluding TAC (traffic acquisition costs) "at the bottom half of the range of financials" previously forecast, Decker said.

In July, Yahoo forecast third-quarter revenue of $1.12 billion to $1.23 billion, excluding TAC. Traffic acquisition costs refer to the share affiliated Web sites take of Yahoo revenue for running Yahoo advertising on their own sites.

"It certainly feels and smells like a macro-economic" problem, rather than something specific to Yahoo or the Internet industry, said Martin Pyykkonen, an analyst with Global Crown Capital LLC.

In general, automakers have moved a significant portion of their advertising to the Internet in the last three years, but industry leaders such as General Motors Corp. and Ford Motor Co. have since been slashing billions of dollars in costs as they grapple with losses in the North American market.

"It would be naive to say that advertisers would continue to pour ahead on online advertising and cut back only on traditional advertising in the face of economic weakness," Pyykkonen said.

Pyykkonen still rates Yahoo as an "outperform" but holds little hope of hitting his $45 share price target anytime in the near-term. "Yahoo came out and said there is a fair-size drop in demand which is scaring everybody," said Richard Williams, director of equity research at interdealer broker ICAP in New York.

"You're going to stop buying things on the Internet first" in the event of a slowdown," Williams said. "We'll be watching results from Google and other Internet companies to see if this is indeed just a blip, or just a specific issue."

Source: Yahoo News