Profits Down, Yahoo to Unveil ‘Panama’ Ad System Earlier Than Expected

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After beating analysts’ earnings expectations for the first time in more than a year, Yahoo Inc. is hoping to make it a more regular habit with an improved advertising system designed to make the Internet icon more competitive with the Web’s top moneymaking machine, Google Inc.

The Sunnyvale-based company plans to unveil the long-awaited upgrade in the United States on Feb. 5, nearly two months ahead of a timetable that management outlined in October. That announcement, made late Tuesday, lifted Yahoo’s stock price nearly 6 percent and overshadowed the Sunnyvale-based company’s fourth-quarter profit report.

Yahoo said Tuesday that it earned $268.7 million, or 19 cents per share, during the final three months of 2006, traditionally the peak season for Web sites like Yahoo that depend on advertising for most of their revenue.

The profit declined 61 percent from net income of $683.2 million, or 46 cents per share, at the same time in 2005, but the two quarters didn’t provide an apples-to-apples comparison. That’s because a one-time gain of $310 million boosted the 2005 results, while the 2006 figures included stock option expenses that weren’t recorded on Yahoo’s books in the previous year.

If not for certain tax benefits, Yahoo said it would have made 16 cents per share — 3 cents above the average estimate among analysts surveyed by Thomson Financial.

It marked the first time that Yahoo had fared better than analysts anticipated since the third quarter of 2005.

Meanwhile, Google — the yardstick by which Yahoo is inevitably measured — made its rival look bad by easily exceeding analyst expectations through the first three quarters of 2006. The online search leader will release its fourth-quarter results next week.

Yahoo is counting on its new advertising platform, code-named Panama, to rejuvenate its growth later this year.

The decision to flip the switch on the new technology ahead of schedule helped boost Yahoo’s stock price by $1.57, or 5.8 percent, in Tuesday’s extended trading. The shares had previously shed 46 cents to close at $26.96 on the Nasdaq Stock Market.

“A lot is riding on this,” Cantor Fitzgerald analyst Derek Brown said. “Will it make 2007 an improvement over 2006? Yahoo better hope so.”

The company originally hoped to introduce Panama late last year but decided to delay the high-stakes project to give its engineers more time to work out the kinks.

“I made the decision to get it right rather than be fast,” Yahoo Chairman Terry Semel said in an interview Tuesday. “We have taken all the time we need, and the (test) results have been very impressive.”

Although Panama is coming out earlier than expected, Yahoo management predicted its first-quarter revenue will fall below analysts’ expectations. Some analysts believe the conservative outlook is designed to give management wiggle room in case Panama’s improvements don’t boost revenue right away.

Yahoo can’t afford for Panama to misfire after spending so much time touting the upgrade’s benefits, said Peter Hershberg, managing director Reprise Media, which manages online ad campaigns. “This is make or break for Yahoo,” he predicted.

Semel reiterated his confidence in Panama during Tuesday’s interview, predicting it will enable Yahoo to become one of the world’s two or three biggest advertising channels. “We had a much broader vision for Panama than people were seeing” last year, Semel said.

Yahoo ended 2006 on the upswing, with fourth-quarter revenue of $1.7 billion, a 13 percent increase from $1.5 billion in the prior year.

In a measure far more important to investors, Yahoo’s fourth-quarter revenue totaled $1.23 billion after subtracting advertising commission that the company paid to its partners. That figure represented a 15 percent increase from the prior year and a 10 percent improvement from 2006’s third quarter.

Wall Street gives more weight to the sequential growth rate _ an area where Yahoo has been falling further behind Google.

The decelerating growth in Yahoo’s sequential revenue helps explain why the company’s stock price plunged by 35 percent last year as Google’s shares continued to climb.

Analysts believe Google will show sequential revenue growth of 17 percent when it releases its fourth-quarter results Jan. 31.

Investors already had been betting Panama will help Yahoo narrow the financial gap in 2007, contributing to an 8 percent increase in the company’s stock price during the first three weeks of the new year.

Yahoo doesn’t expect its sequential revenue to increase in the first quarter, with management predicting revenue minus ad commissions to range between $1.12 billion and $1.23 billion. The average analysts’ estimate had been $1.26 billion, according to Thomson Financial.

In its initial full-year forecast, Yahoo said its 2007 revenue minus ad commissions will range from $4.95 billion to $5.45 billion, below the average analysts’ estimate of $5.47 billion. Analysts had been even more bullish before Yahoo postponed Panama’s launch last July, with 2007 revenue forecasts hovering around $6 billion at that time.

Besides falling further behind Google in the lucrative field of online search, Yahoo also has had trouble capitalizing on the Web’s social networking craze, despite its massive audience of 423 million registered users through December.

The problems bedeviling Yahoo prompted the company to shake up its management team last month, with Chief Financial Officer Susan Decker being promoted to oversee the ad operations and Chief Operating Officer Dan Rosensweig deciding to leave the company in March.

Coupled with the Panama upgrade, the changes seemed to have inspired Yahoo, said Bill Wise, chief executive officer of Did-It Search Marketing, an Internet ad agency.

“Any time you shake up the executive team, it scares people and gives them something to prove,” Wise said. “It’s almost like they got a breath of fresh air and are trying to get their act together in the next six months.”

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