Forbes.com: Yahoo 1Q Profit Drops 11 Percent

From tonight's Forbes.com, analysis of Yahoo!'s Q1 #s....

Yahoo Inc.'s first-quarter profit fell 11 percent, disappointing investors who have been betting that the Internet icon had regained its stride after stumbling through much of last year.

The letdown zapped Yahoo (nasdaq: YHOO - news - people )'s stock, which plummeted more than 8 percent after the results were released Tuesday. Management added to the angst by leaving its financial outlook for the remainder of the year unchanged from its last forecast three months ago.

The Sunnyvale-based company earned $142.4 million, or 10 cents per share, during the three months ended in March. That compared with net income of $159.9 million, or 11 cents per share, at the same last year.

The results were a penny below the average earnings estimate among analysts surveyed by Thomson Financial.

Revenue for the period rose 7 percent to $1.67 billion.

After subtracting advertising commissions, Yahoo's revenue totaled $1.18 billion. That figure fell about $25 million shy of the average analyst projection, according to Thomson Financial.

"When you sift through everything, there is not a whole lot to get excited about right now," said Cantor Fitzgerald analyst Derek Brown.

Yahoo shares shed $2.61, or 8.1 percent, in extended trading after gaining 48 cents to close at $32.09 on the Nasdaq Stock Market (nasdaq: NDAQ - news - people ).

The first-quarter downturn may renew concerns about Yahoo's ability to compete against Google Inc. (nasdaq: GOOG - news - people ), whose Internet-leading search engine propels the Web's most lucrative advertising network.

Through March, Google held a 48 percent share of the U.S. search market compared with 27.5 percent for Yahoo, according to comScore Media Metrix.

The balance of power will likely come into even sharper focus Thursday when Mountain View-based Google is scheduled to report its first-quarter results.

Yahoo has pledged to narrow the gap with its rival this year with the recent introduction of a new marketing platform - dubbed "Panama" - that is supposed to do a better job of distributing ads that will spur revenue-generating clicks. Meanwhile, Google is bolstering its arsenal with its planned $3.1 acquisition of a major online advertising placement service, DoubleClick Inc.

Although Yahoo's new ad system rolled out in the United States in early February, the company's management has repeatedly advised investors that the financial benefits are unlikely to become evident until the second half of this year.

Investors nevertheless had been hoping for more signs of a comeback in the first quarter, a sentiment that had helped lift Yahoo's stock price by 26 percent since the end of December.

The rally recouped some of the losses registered last year when Yahoo shares dropped by 35 percent as the company struggled to keep up with Google. The lackluster performance culminated in a management shake-up that included the departure of Yahoo's chief operating officer, Dan Rosensweig.

Some analysts believe Yahoo Chairman Terry Semel could lose his job as chief executive officer if Panama doesn't accelerate the company's earnings growth. Semel, who is approaching his sixth anniversary as Yahoo's CEO, didn't sound worried during an interview Tuesday.

"I feel really good," he said. "The results are great and we are very happy with what we have done so far."

Besides Panama's long-awaited debut, Yahoo has also raised Wall Street hopes by negotiating potentially lucrative advertising partnerships with Viacom Inc. (nyse: VIA - news - people ) and the publishers of 264 U.S. newspapers.

Yahoo on Tuesday touted another new partnership with PayPal, an online payment service owned by Internet auctioneer eBay Inc. (nasdaq: EBAY - news - people ) To help counter
Google's heavy promotion of its own "Checkout" payment service, Yahoo will begin featuring small shopping cart icons alongside the ads of about 2,500 merchants who accept PayPal. The financial terms of Yahoo's PayPal partnership weren't disclosed.

Copyright 2007 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed

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