Investors betting on Yahoo Inc.'s 2007 comeback might have gotten ahead of themselves.
The Internet company Monday reported first-quarter earnings that fell 11%, and it declined to raise its revenue forecasts for the second quarter. The results disappointed shareholders, who had hoped that Yahoo’s revamped advertising system was doing more to help Yahoo gain ground on rival Google Inc.
Despite Yahoo Chief Executive Terry Semel’s assurance that the new system, known as Panama, was “working like a charm” so far, investors knocked 8% off the company’s stock price in after-hours trading. Its shares had climbed 25% this year on optimism about Panama.
“Yahoo’s business continues to be in a state of transition,” said Derek Brown, an analyst with Cantor Fitzgerald. “We continue to see potential in Yahoo, but we want to see tangible evidence that Panama is driving materially higher spending from their advertisers and that [Yahoo executives] stem their losses in market share.”
Sunnyvale, Calif.-based Yahoo said it earned $142 million, compared with $160 million during the year-earlier period. Earnings of 10 cents a share fell a penny short of analysts’ estimates. Yahoo earned 11 cents a share during the first three months of last year.
Revenue increased 9% to $1.67 billion, from $1.57 billion.
Yahoo has a great deal riding on Panama, which is designed to increase the rate at which Web searchers click on ads. Analysts estimate that Yahoo generates from 40% to 50% of its revenue from search advertising, but the company has acknowledged that rival Google’s ad-serving technology is much better. That’s a big deal because search engines don’t get paid unless surfers click on the ads.
Yahoo released its system in early February and cautioned that Panama wouldn’t meaningfully affect its sales until the second half of this year, when its advertisers have had a chance to gauge how well it works.
But analysts said that Semel’s recent comments about how well Panama was working led some investors to expect more from the first-quarter results and Yahoo’s forecasts.
“There’s a lot of positive sentiment surrounding Panama,” said Laura Martin, an analyst with Soleil Securities Group.
Yahoo is the No. 2 search engine but trails Google by a wide margin. Google’s share of online searches increased in March to 48.3%, from 48.1% the previous month, while Yahoo’s slipped to 27.5%, from 28.1%, according to ComScore Media Metrix.
Even if Panama isn’t boosting Yahoo’s profit much yet, early reports suggest that it’s sending more viewers to advertisers’ websites. Advertisers pay close attention to how often their text ads beside search results are clicked on.
“We noticed click-through-rate increases nearly across the board for our clients,” said Ben Perry, director of paid search at IProspect, a search engine marketing firm in Watertown, Mass.
Some advertisers said they wanted more.
“More people are clicking through to our site,” said Tyler Ransburgh, marketing manager for Go Big Networks, a website for start-up companies. But he added that the system apparently hadn’t delivered the right kind of traffic, because he hasn’t seen a jump in paying customers. “Ultimately, you want people to buy what you’re selling.”
Semel said advertisers would see better results as the new system “learns and adapts.”
“Generally speaking, the results are terrific,” he said in an interview. “We expect some revenue from Panama to begin to hit in the second quarter and to pick up dramatically in the following quarters. It’s working like a charm.”
Calls for Semel to step down have been largely silenced since the company rebounded from a disastrous 2006, when its shares lost 35% on worries that the company couldn’t keep pace with Google. Yahoo shares gained 48 cents to close at $32.09, before the earnings release, a 25% gain on the year. Google’s shares have gained only 3%.
Investors have also latched onto some key customer wins by Yahoo this year.
The company Tuesday renewed a deal to provide search results and ads for United Online Inc., a Woodland Hills-based Internet service provider. It won a similar deal last week to put ads on MTV.com and other Viacom Inc. websites.
On Monday, Yahoo inked an agreement to share online advertising with McClatchy Co. and four other newspaper publishers, expanding the number of papers in its stable of partners to 264 from 176.