Awaiting Yahoo!'s Q1 Results

Tomorrow evening, Yahoo! will announce its Q1 results. Here's Kevin Delaney's preview from Saturday's WSJ:

Investors Gauge Yahoo's Ad-System Revamp

By KEVIN J. DELANEYApril 14, 2007; Page A2

Yahoo Inc. named a major overhaul of its online-advertising systems after the Panama Canal. Investors hope for some insight Tuesday into whether the upgrade is leading the Internet company to smoother waters.

Chief among their preoccupations is whether the online-ad-system improvements, made partly in hopes of bridging the gap with rival Google Inc., are leading advertisers to spend more money with Yahoo. Yahoo, Sunnyvale, Calif., said in January that it didn't anticipate any revenue impact from the improvements until the second quarter, a comment that some expect the company to reiterate when it reports first-quarter results. The Internet company has been wrestling with declining revenue growth and doubts by some investors about Yahoo's strategy and execution.

But early indications are that advertisers like Panama, despite some frustration, particularly among small businesses, with the hassle of shifting over to a new system. Yahoo in early February altered the way its Web search ads are sold, changing from a straight auction system to one like Google's that weighs other factors besides advertiser bids in choosing which ads to display and what to charge. Among other things, such a modified auction system displays more prominently ads that users click on often, an arrangement that can increase Yahoo's revenue because advertisers pay only when a user clicks.

Analysts say that for some big, brand-name advertisers, the Panama search-ad upgrade is improving the financial return on what they spend with Yahoo. The search ads are "more effective, getting more people clicking on them, and therefore I'm spending more money," says Paula Drum, vice president of marketing at H&R Block Inc., the Kansas City financial and tax services company.

Based on similar feedback, Goldman Sachs analysts recently raised their Yahoo revenue estimates to reflect a benefit from Panama beginning in the first quarter of 2007. Research firm eMarketer Inc. estimates that Yahoo's search advertising will rise about 28% this year to $1.35 billion, when certain payments to partners are factored out. That would be a big improvement from a 7.5% increase last year. "It's doing a turnaround," says eMarketer senior analyst David Hallerman.

Some analysts caution that the Panama tweaking of Yahoo's search-ad auction will go only so far to boost revenue, particularly if Yahoo doesn't greatly expand the volume of search queries that it handles and can use to place ads. Yahoo's share of the U.S. search market was 28% in the first quarter, essentially flat from the fourth quarter of 2006, according to Majestic Research Corp. and comScore Networks Inc. That compares with Google's 48% share in the first quarter.

There are signs that Yahoo is making progress in this area. The company is finalizing a major deal that would have newspaper partners use its search on their Web sites, according to people familiar with the matter. That deal could be announced as early as this week. In the past week, Yahoo announced an exclusive, multiyear agreement to provide search-and-advertising services to some sites owned by media giant Viacom Inc. A Yahoo spokeswoman declined to comment for this article, citing a pre-earnings quiet period.

Write to Kevin J. Delaney at kevin.delaney@wsj.com

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