No cheers for Yahoo!
Search engine reports profits below forecasts, disappointing guidance; stock tumbles after-hours.
By Paul R. La Monica, CNNMoney.com senior writer


NEW YORK (CNNMoney.com) - Yahoo! investors were not exactly yodeling after the search engine company reported fourth-quarter results Tuesday.

The sound you'd hear from a Yahoo! shareholder was more probably like a howl of anguish.

Great expectations: Shares of Yahoo! surged in recent months on hopes of strong fourth quarter results and a boost to 2006 sales guidance.
Great expectations: Shares of Yahoo! surged in recent months on hopes of strong fourth quarter results and a boost to 2006 sales guidance.
A fourth-quarter earning miss and disappointing sales guidance sunk Yahoo! stock.
A fourth-quarter earning miss and disappointing sales guidance sunk Yahoo! stock.

Yahoo! (Research) stock plunged more than 13 percent after the Internet search and media company reported fourth-quarter earnings of 16 cents a share, excluding one-time items, a penny below Wall Street's expectations.

Sales, excluding traffic acquisition costs (TAC) that Yahoo! shares with affiliate partners, came in at $1.07 billion, roughly in line with analysts' estimates.

The company's guidance also disappointed investors. The company said that for the first quarter, sales excluding TAC would be in a range of $1.04 billion to $1.1 billion. The $1.07 billion midpoint was below the $1.09 billion in sales that Wall Street had been expecting.

And for the full year, Yahoo! said revenue would be between $4.6 billion and $4.85 billion -- with a midpoint of $4.73 billion or so, below the average forecast of $4.79 billion.

Yahoo!'s less-than-stellar results came on the same day as weaker than expected fourth quarter results from chip industry leader Intel. (Research) These reports paint a bleak picture for tech heading into Wednesday.

Stopped in its tracks?

The Nasdaq is up nearly 4.5 percent so far in 2006, largely due to expectations of a rebound in the tech sector, but now investors have reason to question just how strong tech earnings are.

"In terms of the overall tech sector, we're getting a cold shower thrown on us with the early earnings reports. The Nasdaq was off to a good start but now investors are getting a speeding ticket," said Richard Skaggs, co-manager of the Loomis Sayles Growth fund, which owns shares of Yahoo! and Intel.

Even though Yahoo! reported a sales gain of 36 percent from a year ago and an earnings per share increase of 32 percent for the quarter, that was not enough to satisfy Wall Street. After all, Yahoo! was priced for perfection, trading at a multiple of 53 times 2006 earnings estimates.

"The stock was valued as if Yahoo! was going to beat fourth quarter consensus expectations and raise guidance for 2006. Clearly that wasn't the case," said David Garrity, director of research with Investec U.S.

Scott Devitt, an analyst with Stifel Nicolaus & Co., said that the reaction to Yahoo!'s earnings miss was justified. He said that investors had been pricing in an irrational amount of outperformance from the company.

Tempering lofty expectations

Devitt said investors have similarly lofty expectations for Yahoo!'s top rival, Google, and he thinks that as a result of Yahoo!'s miss, investors will start to take a more reasonable look at just how strong the business models are for both companies.

"Earnings estimates should stop going up for both companies and people will try and figure out what the businesses are really worth, which is what they should have been doing in the first place," Devitt said.

Garrity added that Yahoo's miss should have Google's investors concerned about whether the online advertising outlook for this year is too robust. "Do ducks swim in the water?" Garrity said, when asked about whether the relative weakness of Yahoo!'s results could mean that Google may also have had a tougher-than-expected fourth quarter. Google's (Research) stock dipped in sympathy with Yahoo! in after-hours trading Tuesday, falling more than 3 percent.

Still, shares of Yahoo! have lagged Google during the past year as Google's sales and earnings have grown more rapidly thanks to Google's reliance on sponsored-search advertising, the healthiest area of the online advertising market. But one analyst said it's unfair for Wall Street to try and compare Yahoo! to Google.

"It's unreasonable to expect the type of growth from Yahoo! that you see from Google but people want to see numbers that suggest Yahoo! is doing a good job vis-a-vis Google," said Scott Kessler, an equity analyst with Standard & Poor's.

In fact, Kessler said he expects Yahoo! to continue to try and show how it is different from Google as a way to convince advertising agencies and other media firms that it isn't trying to encroach on all of their business.

Some fear that Google may be in fact doing that. To that end, Google said Tuesday it was buying privately held radio advertising firm dMarc Broadcasting, a move that will expand Google's reach into radio and perhaps other forms of media.

But by partnering with ad agencies, instead of competing with them, Kessler said Yahoo! should be able to keep attract big advertising commitments from well-known brand-name companies, something that Google has yet to do much of.

"With Google buying dMarc, it's obvious that intermediaries in the advertising business are going to have a curious relationship with Google. But Yahoo! is a company that focuses its attention on advertising agencies so that's why it has been more successful with larger companies advertising online."

Along those lines, Yahoo! chief executive officer Terry Semel pointed out several times during the company's conference call with analysts that it wanted to be an advertising "partner" with publishers and added that the company was focused on enhancing "deeper relationships" with its largest advertisers.

Semel, without mentioning Google by name, constantly referred to Yahoo! as being the "Internet leader" and stressed how it can offer advertisers branded-forms of ads, i.e. graphic-based ads, in addition to the types of keyword-search ads that Google depends on for the large bulk of its sales.

"Yahoo! is the only company with both scale and leadership in branded and search advertising," said Semel.

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For more about Intel's disappointing quarter, click here.

For all of CNNMoney.com's special earnings coverage, click here.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties with the companies. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.