Analyst Expectations Too High for Yahoo to Meet

Revenue Up 7%, Profit Drops 11% and Stock Declines 12%

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NEW YORK ( -- Yahoo's stock fell almost 12% today, after the company reported first-quarter earnings late yesterday. The company's first-quarter profit dropped 11%, thanks to higher operating costs and the growth rate for branded advertising, or display, revenue decelerated to 20%.
Bottom line, wrote UBS analyst Benjamin Schachter, was 'high expectations, disappointing results.'
Bottom line, wrote UBS analyst Benjamin Schachter, was 'high expectations, disappointing results.'

Analysts had high expectations for Yahoo, given the positive feedback around its new search platform, Panama. Panama is widely viewed as a much-needed improvement to Yahoo's previous platform, because it takes ad quality and relevance as well as bidding price into account when it serves up search ads, thus garnering more clicks and revenue.

Panama no panacea
But marketers warned Panama would be no panacea for Yahoo. The company also needs to increase its search audience, likely through syndication deals. And marketers are clamoring for Yahoo to better align display and search, something the company is working on.

Revenues excluding traffic acquisition costs were $1.2 million for the first quarter of 2007, a 9% increase over the same period last year. Its operating income fell 16% to $169 million.

Analyst registered mild disappointment at the results, mostly blaming high expectations. "Results could be considered disappointing due to very positive comments made by management to advertisers on early Panama results," wrote Merrill Lynch analyst Justin Post, though reminding investors that it's early and Panama will take several years to fully rollout.

Bottom line, wrote UBS analyst Benjamin Schachter, was "high expectations, disappointing results."

CEO is upbeat
Yahoo CEO Terry Semel told investors on an earnings call that he was upbeat about Panama and expects it to have financial impact in second quarter. He also cited the importance of display advertising to Yahoo, an area in which it leads. Google recently announced its purchase of DoubleClick, which specializes in display-ad serving, in an attempt to challenge Yahoo.

Mr. Semel said Yahoo would continue to align its sales forces, add more advertiser tools and expand its ad network.

"As the market undergoes this natural transition, we expect that this year our growth will be broadly consistent with the U.S. display market," he said. "Importantly, that's from a much higher base and we continue to be the largest display network." In the first quarter, display revenue from the top 200 advertisers grew 20%. Longer term, Mr. Semel said, Yahoo intends to outpace the growth of the market. According to eMarketer projections, total display ad spending will grow almost 13% in 2007.

Monetizing Yahoo Answers
He said Yahoo has taken initial steps to monetize Yahoo Answers, its wildly popular question-and-answer service, through sponsored search, content matching, display, sponsored questions and a knowledge partner program currently in beta. He also touted Yahoo's video initiatives, including the relationship with the recently announced NBC/News Corp. joint venture.

Mr. Semel was also asked to address the Google DoubleClick purchase.

"It certainly does validate Yahoo's strategy for these past few years," he said. "We always saw it as a very important aspect of advertising and happy to see others now finally coming to that table. As to how the individual advertisers will feel about working with DoubleClick, I think you'll see -- my guess is there'll be some who are fine and there'll be many who perhaps aren't fine. So that's up to them and that's up to their decisions."
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