Yahoo Shares Hammered After Earnings Report, Ad Platform Delay

Shares of Yahoo traded lower by nearly 20 percent Wednesday morning as investors and analysts digested an on-target earnings announcement overshadowed by word that the launch of its long-awaited self-service advertising platform would be delayed.

Yahoo said it earned US$164.3 million, or 11 cents per share, during the quarter that ended in June. Though the profit figure matched analyst forecasts, it represented a 78 percent decrease over the same period last year, when Yahoo divested itself of a small ownership stake it held in rival Google.

Panama Problems

Revenue was up 26 percent, meanwhile, to $1.58 billion, just about in line with most forecasts.

While Yahoo’s outlook was disappointing to some, what really rattled investors was Yahoo’s disclosure that its new ad-serving platform, known as Panama, will be delayed and not launched this summer as expected. That delay will give Google time to extend its search lead and let MSN have a longer unfettered ramp-up for its AdCenter system.

In a conference call, CEO Terry Semel acknowledged that the new platform is needed to boost Yahoo’s ability to maximize its revenue and profits from advertising by enabling better targeting and more efficient ad delivery in general. He said that work on getting the ad system compatible with hundreds of partners has slowed its debut.

“To meet the standards that we believe our clients should expect from us, we think it is prudent to add some extra time to our original estimates for the commercial launch,” Semel said. He added that the advertising management part of the system would now roll out in the fourth quarter with the “marketplace design” part of the platform that allows specific aid tailoring functions to be rolled out early in 2007 instead of later this year. “We believe this is the right decision, in terms of assuring the most successful commercial launch possible.”

Investors were dismayed enough by the delay to push Yahoo shares to a new 52-week low in morning trading Wednesday, with the stock tumbling 19 percent to $26.06.

Eyes on Google

The report will likely only add to the attention being paid to Google’s earnings, which are due out after markets close on Thursday. Google has been gaining market share in the search space and its numbers will be scrutinized for signs that it is pulling away from competitors, even as its own rocket-like growth rates have slowed in recent quarters.

Semel and other Yahoo executives tried to keep the focus on the positive. New developments in the quarter included Yahoo’s linking with eBay on a sweeping advertising and search partnership, and the re-design of the Yahoo home page and the heavily trafficked Yahoo Finance site.

Still, those looking for reasons to be pessimistic had plenty to focus on, including reports that social networking site MySpace had leapfrogged Yahoo to become the most heavily visited site on the Web.

Still, Yahoo said fee-based revenue was up some 23 percent on a comparable basis in the quarter to $190 million. It ended the quarter with 14.3 million subscribers to paid services, 1 million more than at the start the quarter and up 42 percent over last year. Each paid subscriber generates between $3 and $4 per month in revenue, Yahoo said.

CFO Susan Decker said Yahoo continued to aggressively repurchase its own stock, spending some $51 million in the quarter on its shares.

As for its outlook, Decker said Yahoo expects third-quarter revenue to be between $1.11 billion and $1.22 billion, the midpoint representing a 26 percent increase from a year ago. Profits were also forecast to grow by double-digit amounts.

Bad News Bears

Stock investors remained focused on the delay in Panama, however, and how it would affect Yahoo’s ability to keep Google from rolling up additional market share in the meantime.

Yahoo COO Dan Rosenweig said in the conference call that the delay was not because of “bugs in the system.”

“The reality is we put out our best timeline at the time,” he declared. “We’re two months further into it. To get it over the goal line the way we want to, we just think it’s going to require a little bit more time to make it the quality of the kinds of products that we normally release. So we would rather do it right and take a little extra time than hurrying it out to make a particular date.”

Yahoo still has the advantages of sheer traffic volume and a sprawling portal landscape where it can serve ads, according to Forrester analyst Charlene Li. Still, with MSN AdCenter launching and Google continuing to rack up market share gains based on latest search traffic figures, additional delays can be costly.

Yahoo probably regrets releasing the original timeline, she added, but may have felt some pressure to have Panama not overshadowed by the AdCenter debut. “Yahoo can still assure advertisers and publishers that a better system is coming soon,” Li told the E-Commerce Times.

Others believe Google is directly dragging down Yahoo’s fortunes and predict that Thursday’s Google earnings release could show signs that it is surging ahead again.

“There was a time in the not so distant past that we doubted Google’s ability to become a disruptive force in this sector — we no longer harbor such doubt,” Stifel Nicolaus analyst Scott Devitt said in a research note.