Yahoo Shares Slide on Dismal Q1 Results

Yahoo reported first quarter net earnings down 11 percent from Q1 of last year as the global Internet brand faces stiff competition from search-based advertising leader Google.

Google captured a first-place 48.3 percent of the U.S. search market as of March 2007, compared to Yahoo’s second-place ranking of 27.5 percent, according to the latest data from comScore Media Metrix. Microsoft’s sites garnered a distant third with a 10.9 percent share.

To combat Google and its meteoric success with text-based search advertising, Yahoo launched a new online advertising system late last year, dubbed “Panama,” which was designed to increase the rate of advertising clicks by Yahoo’s users.

Increased Overhead

While success related specifically to Panama is yet to be seen, Yahoo posted overall revenue gains of 7 percent, bringing first quarter net income to US$142 million, as compared to $160 million for the same period in 2006. The discrepancy between positive revenue gains and negative net earnings is due to higher operating expenses, the company reported.

The stock price sagged about 8 percent in after-hours trading Tuesday.

“We continued to make good progress against the goals we outlined for the company last year and as a result, delivered a solid financial performance for the first quarter,” Terry Semel, Yahoo chairman and CEO said. “Yahoo remains committed to delivering both increased value for advertisers and the highest quality content to the majority of the world’s Internet population. With this powerful combination, we believe that Yahoo is well positioned to capture the major growth opportunities we see ahead for the future.”

Panama and the Google Gap

While Yahoo’s own projections for Panama’s positive effects weren’t targeted for the first quarter of this year, Panama was expected to deliver more indications of success by now, especially after Yahoo shook up its management team in an effort to combat its dismal 2006 financial year.

“I think Panama will eventually pay off for them,” Greg Sterling, analyst and founder of Sterling Market Intelligence, told the E-Commerce Times. “It’s a better platform, has more features, is more robust, and marketers like it. What’s interesting is there was a lot of hype about it — Semel even made remarks that we were going to see results in Q1.”

The problem for Yahoo, he noted, is the combination of Semel’s cheerleading with previous guidance from last quarter’s Yahoo financial report, where the company said it expected to see Panama-related results closer to the middle of 2007.

“Yahoo should have managed expectations better, saying something like, ‘We’re pleased with the progress so far, but refer back to our previous remarks about the second half of 2007,'” stated Sterling, who expected Yahoo to be much more cautious about Panama so early in the game. “Yahoo’s report was a surprise because of what people had been led to believe.”

Google Attacks

To make matters more challenging for Yahoo, Google announced last week that it plans to acquire DoubleClick, a company that manages graphical online advertising. Yahoo is particularly strong with its graphical ad services and is also a DoubleClick customer. The acquisition will not only give Google a leg up in graphical online advertising, but could also turn Yahoo into a Google client.

At the same time, Yahoo has strengthened its position with newspapers. The company has secured deals to provide search boxes for the online Web sites of 264 newspapers in the U.S. Significantly, the arrangement will include the use of Yahoo’s graphical advertising technology.

“Overall, Yahoo will remain a major player, the No. 2 player in online advertising, because there’s nobody else, not even Microsoft, in the same position,” Sterling said.