Tuesday, January 23, 2007

Yahoo!'s Quarter to Forget

From today's Forbes by Rachel Rosmarin:

Burlingame, Calif. -

Beleaguered Yahoo! investors are desperately looking for a sign that the once-dominant Internet company is on the mend. But they're unlikely to get what they're looking for Tuesday afternoon, when the company releases its fourth-quarter results.

Instead, expect to hear many variations on this theme: "Trust us--things are going to get better."

That's because Yahoo!'s (nasdaq: YHOO - news - people ) Chief Executive Terry Semel's best-case scenario--that an improved ad sales and distribution platform, meant to help the company catch up to Google (nasdaq: GOOG - news - people ), actually works as intended--won't start to kick in until this summer.

In the meantime, Yahoo! has already prepared Wall Street for its current, grim reality. While Internet advertising continues to boom--online ad spending in the U.S. alone grew 26% in December--analysts expect the company to record about $1.22 billion in revenue, down 23% from the same period a year ago.

The company is expected to post earnings of 13 cents per share. Assuming Yahoo! hits these meager expectations, the best thing it will be able to say about its fourth quarter is that it was better than the third quarter, when the company surprised investors with underwhelming results.

This could-be-worse approach has had some benefits for the company: Its shares, down 20% over the past year, are actually up 11% since bottoming out at $24.60 last fall. Now Semel needs to impress investors listening keenly for hints about the coming year--particularly Yahoo!’s new Panama platform.

Google, at one time a Yahoo! acquisition candidate, now gets double the revenue from each search query on its engine. Panama is supposed to narrow that gap. But thus far, Yahoo! has been loath to divulge any numbers about its long-delayed technology, which it had rolled out to about 30% of advertisers by the end of the year, according to CIBC World Markets analyst Paul Keung.

A rough proxy for Panama's progress will come from the company’s earnings and revenue guidance for 2007. Analysts expect 2007 earnings before interest, taxes, depreciation and amortization of about $2.2 billion on and revenue of $5.47 billion.

Also a subject of much curiosity: The progress Yahoo! has made in its management reorganization, announced in December. It has yet to hire a new chief financial officer to replace Sue Decker, who has moved up the organization's chart and is now Semel's chief lieutenant; it also has an opening for what should be a crucial job running its new audience group.

In the absence of positive news, criticism of the company is only going to get louder. This month, for instance, investor Eric Jackson launched a blog campaign demanding other changes, such as immediately giving Semel's job to Sue Decker.

A week later, Wired published a sharply critical article casting blame on Semel for failing to acquire Google in 2002, along with other missteps. Bloggers chimed in with nods of agreement. Yahoo! made an unusual public response to the piece, arguing that the company is in a better position than ever due to Panama and the reorganization. Yahoo! acknowledged that it would "continue to take bruises publicly," until Panama's full rollout.

But Yahoo! won't be able to block many more punches thrown by its critics until it begins to offer more substantial evidence of Panama’s success. Yahoo! should choose to increase transparency--soon--about the real potential of the ad platform, or risk further alienating investors.

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