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Yahoo profit falls short of expectations

Yahoo Inc.’s shares dropped Wednesday as investors expressed their disappointment with the Internet powerhouse’s inability to reap bigger gains as advertisers shift more of their spending to the Web.
/ Source: The Associated Press

Yahoo Inc.’s shares dropped Wednesday as investors expressed their disappointment with the Internet powerhouse’s inability to reap bigger gains as advertisers shift more of their spending to the Web.

The selloff came after Sunnyvale, Calif.-based company reported late Tuesday that its fourth-quarter profit nearly doubled, but fell shy of analyst expectations.

It marked the second consecutive quarter in which Yahoo reported earnings growth that investors interpreted as a sign that the company isn’t capitalizing on the online advertising boom as well as its rival, online search engine leader Google Inc.

“Yahoo has a good story going; it’s just not as good as Google’s,” said Internet industry analyst Safa Rashtchy of Piper Jaffray. “We would expect to see faster growth in a growth market that seems to be on fire like this one.”

Yahoo earned $683.2 million, or 46 cents per share, during the three months ended in December. That represented an 83 percent increase from net income of $372.5 million, or 25 cents per share, at the same time in 2004.

The 2005 results included a $310 million gain triggered by a complex deal that left Yahoo with a 40 percent stake in, China’s largest e-commerce company.

If not for that gain and other accounting items unrelated to its ongoing operations, Yahoo said it would have earned 16 cents per share. That figure fell a penny below the average estimate among analysts polled by Thomson Financial.

Revenue for the quarter totaled $1.5 billion, a 39 percent increase from $1.08 billion in the comparable 2004 period.

After subtracting the advertising commissions that Yahoo paid to other Web sites, the company’s fourth-quarter revenue stood at $1.07 billion, in line with analyst estimates.

Although Yahoo’s profits have been steadily rising in recent years, the company has struggled to develop an automated system that’s as effective at serving up moneymaking ads as Google.

“Frankly, Google has done a better job than us,” Yahoo Chairman Terry Semel acknowledged during a Tuesday interview.

Both Yahoo and Google display text-based ads on hundreds of Web sites in addition to their own, but only get paid when the links are clicked on.

Google’s knack for enticing clicks has generated a long stretch of stellar earnings growth that has eclipsed Yahoo’s. As a result, Google is currently worth twice as much as Yahoo, even though it started three years later.

“It’s like we built our house first and someone came along and built an even better house,” Semel said.

Investors have been betting Google will surpass analyst expectations Jan. 31 when it’s scheduled to report its fourth-quarter earnings.

A growing number of people also are relying on Google to process search requests, another factor depriving Yahoo of an opportunity to make more money. Through November, Google held a 39.8 percent of the U.S. search market, up from 34.6 percent at the same juncture in 2004, according to comScore Media Metrix. Meanwhile, Yahoo’s share has dropped to 29.5 percent, down from 32 percent in November 2004.

Based on Tuesday’s results, Rashtchy suspects Yahoo may have lost even more market share during December. “Something seems amiss,” he said.

Semel has been promising to introduce improved advertising algorithms later this year, a pledge he reiterated Tuesday. But he stressed it will be a gradual process that’s unlikely to have a significant impact on Yahoo’s earnings until 2007.

Drumming up more advertising will become even more important later this year when Yahoo will lose one of its biggest partners, Microsoft Corp.’s, which plans to launch its own marketing network this summer.

Yahoo said Tuesday that it expects to lose about $120 million in advertising revenue generated by its partners this year. Besides the Microsoft setback, the erosion also reflects an expectation that Yahoo will have to share more revenue with its other remaining partners.

Despite those challenges, Yahoo management predicted the company will continue to thrive as advertisers ante up to reach its vast audience. Yahoo ended 2005 with 365 million users, a 21 percent increase from 2004.

In an attempt to become less dependent on advertising, Yahoo has been selling more services, such as high-speed Internet access and matchmaking, to its visitors.

The company ended the year with 12.6 million subscribers, an 11 percent increase from 11.4 million in September. The subscribers paid $186 million in fees during the fourth quarter, a 38 percent increase from the same time in 2004.

Spurred by its steady growth, Yahoo added another 674 workers during the fourth quarter, expanding its payroll to 9,816 employees at the end of 2005.

Excluding its ad commissions, Yahoo forecast its 2006 revenue will range from $4.6 billion to $4.85 billion — a 24 percent to 31 percent increase from 2005. The average 2006 revenue estimate among analysts is $4.77 billion, according to Thomson Financial.

For all of 2005, Yahoo earned $1.9 billion, or $1.28 per share, on total revenue of $5.26 billion. Net income for 2004 totaled $839.6 million, or 58 cents per share, on total revenue of $3.57 billion.