Yahoo Grows Ad Sales but Still Disappoints Wall Street

Portal Promises to Transition Advertisers to New Platform Panama

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NEW YORK ( -- Well, at least the Street knew it was coming: Yahoo's third-quarter profit fell 37%, the company announced today after the market had closed.
Yahoo's third-quarter sales were up but profits were down.
Yahoo's third-quarter sales were up but profits were down.

Down $95 million
Net income for third quarter was $159 million, or 11 cents a share, vs. $254 million (17 cents a share) for the year-ago period. But ad sales rose. Revenues after traffic-acquisition costs (the cut Yahoo pays its affiliates to sell ads across their sites) were $1.12 billion, up 20% from the $932 million the company snagged in third quarter 2005.

Still, investors were not happy with the sales, which fell below most estimates. What's more, there may be rougher times ahead for the web giant. Yahoo's fourth-quarter forecasts of revenue (excluding traffic-acquisition costs) were between $1.145 billion and $1.265 billion, below most analyst expectations.

Chairman-CEO Terry Semel addressed the company's disappointment in a statement: "While we are tremendously excited about many things happening at Yahoo, we are not satisfied with our third-quarter financial performance. We continue to grow and believe that we outperformed the graphical market but not at a rate that met our expectations."

Three key areas
Mr. Semel kicked off the earnings call with a long speech, outlining for investors three key areas in which the company will focus: closing the gap in search monetization, widening Yahoo's lead in graphical advertising and seizing the opportunity in emerging channels such as social media, video and mobile.

Mr. Semel announced that Yahoo is beginning to transition advertisers to its new search-advertising platform, dubbed Panama, as of today. Many analysts have suggested part of Yahoo's problem stemmed from Panama's delay until early 2007. Panama is expected to help Yahoo monetize its search results better, an area in which Yahoo has trailed Google. The process of transitioning into Panama will continue into early 2007, according to the CEO.

He also addressed a weaker market for graphical online ads, an area in which Yahoo has always been strong. Third-quarter graphical advertising saw a reduction from certain clients, he said, "because of their own business issues."

'Slower but still solid growth'
Sue Decker, chief financial officer, echoed that sentiment as she revised the company's fourth-quarter business outlook. "This outlook contemplates slower but still solid growth in our core advertising business with global graphical and other nonsearch business up around 20% year over year and global search up in the mid-single digits," she said. She did not indicate what categories besides the previously announced autos and financial were experiencing a slowdown.

Yahoo has been thoroughly overshadowed by Google, which acquired online video provider YouTube for $1.6 billion last week. Many analysts praised Google's decision, reasoning that, if nothing else, the purchase kept the property away from Yahoo and other competitors.

Yahoo's stock has reflected the Street's disappointment, falling from a high of more than $43 a share in early January to today's closing price of $24.15.

Mr. Semel also talked about social media, saying that Yahoo had the "foresight to buy Flickr back in the early part of 2005" and that it is moving quickly to strike partnerships with video-content producers and produce its own contextually relevant video for its vertical categories.
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