Good news and bad news for Yahoo!

NEW YORK (CNNMoney.com) -- Yahoo!, the world's second largest Internet search company, reported fourth quarter results Tuesday that beat Wall Street expectations but issued a tepid forecast for 2007.

The news initially sent the stock lower in after-hours trading but the stock surged once Yahoo chief executive officer Terry Semel reassured Wall Street during a conference call that the company's new search tool would help boost Yahoo's sales later in the year.

Yahoo! had a rough 2006 but the stock is off to a decent start in 2007 and appears set to head higher following upbeat comments from management about the company's new search tool, Panama.

Shares of Yahoo were up more than 4 percent in pre-market trading on the news.

The Sunnyvale, Calif.-based Yahoo (Charts) reported sales of $1.7 billion, up 13 percent from a year ago.

Excluding traffic acquisition costs (TAC), which is the amount of advertising revenue Yahoo shares with partners, the company reported revenue of $1.228 billion. Analysts were expecting Yahoo! to post sales of $1.22 billion on this basis, according to figures from Thomson First Call.

The company generated a net profit of $269 million, or 19 cents a share, compared to earnings of $683 million, or 46 cents a share, a year ago. Last year's figures did not include stock option expenses while this year's earnings did.

Excluding certain one-time items, such as tax adjustments, the company reported a profit of 16 cents a share, up from 13 cents a year ago on this basis and ahead of the 13 cents per share that analysts were expecting on that basis.

For the full year, Yahoo reported sales of $6.4 billion ($4.6 billion excluding TAC) and earnings per share, excluding one-time items, of 50 cents a share.

But even though Yahoo beat fourth-quarter forecasts, investors initially appeared to be disappointed by Yahoo's lackluster forecast for the first quarter and all of 2007.

The company said it expected sales, excluding TAC, for the first quarter to be in a range of $1.12 billion to $1.23 billion. Analysts were expecting sales of $1.26 billion. For the full year, Yahoo said sales should be between $4.95 billion and $5.45 billion. Wall Street was forecasting revenues of $5.47 billion.

Yahoo does not give earnings per share guidance but it did give a forecast for operating cash flow that also was below Wall Street's consensus estimates. The company said it expected operating cash flow of between $420 million and $480 million for the first quarter and $1.95 billion to $2.2 billion for the full year. Analysts were projecting operating cash flow of $485 million for the first quarter and $2.21 billion for all of 2007.

Yahoo has had a rough time competing against search leader Google (Charts) and is also facing a challenge from popular social networking sites such as News Corp. (Charts)-owned MySpace and privately held Facebook as well as online video leader YouTube, which Google acquired last year. The stock fell 35 percent in 2006.

Yahoo reshuffled its executive ranks in December and also recently rolled out a new search tool, code named Project Panama, to advertisers in the hopes of gaining ground it lost to Google.

But CEO Semel expressed optimism for 2007, despite the disappointing forecast.

"I am confident that our new structure and concentrated focus on Yahoo's key priorities puts us in the best position to take advantage of the many opportunities that we see ahead for 2007 and beyond," said Semel in a statement.

And even though it's too early to tell if Panama will be a success, there are some encouraging signs for Yahoo.

Semel said during a conference call with analysts and investors that many of its U.S. advertisers had been transitioned to Panama and that all advertisers will be using the system by the end of the first quarter. He added that a new search ranking model will be launched on February 5 that should be an improvement to Yahoo's current search tools.

"We believe this will deliver more relevant ads to users which in turn will deliver higher quality leads to advertisers," Semel said, adding that Yahoo should begin to see a revenue lift from Panama in the second quarter and that an international rollout of Panama would begin in the second quarter as well.

One analyst said it was crucial for Semel to talk so positively about Panama.

"A lot of big investors want Semel out because of the missed execution with Panama so it's important for him to reassure investors that Panama will work," said Sasa Zorovic, an analyst with Oppenheimer & Co.

Another analyst said that based on what Yahoo had to say about Panama, it was possible that the company's 2007 guidance may turn out to be very conservative. So Yahoo could be setting the stage for a better-than-anticipated second half of the year if Panama delivers on Yahoo's promise to boost the company's revenue per search.

"The guidance suggests some acceleration in sales during the second half of the year but we'll have to wait and see," said Steve Weinstein, an analyst with Pacific Crest Securities. "The guidance is not aggressive so I'm comfortable with the numbers they are talking about for 2007."

And Yahoo had some more good news about search on Tuesday. According to figures from Nielsen//NetRatings that were released before the earnings announcement, Yahoo's search engine volume in December increased 30 percent from a year ago, a faster growth rate than Google, which posted a 22.6 percent increase.

Yahoo's growth in search also outpaced that of Time Warner's (Charts) AOL unit and IAC/InterActive's (Charts) Ask.com. (Time Warner also owns CNNMoney.com) And Microsoft (Charts), which owns MSN, reported a nearly 10 percent decline in search volume.

But another analyst said that even if Yahoo's sales improve later in the year thanks to Panama, the company still faces a difficult road ahead.

"It's a very tricky time. There are some investors who are comfortable waiting several months for Panama to cause a lift in the business but there are challenges out there for the company," said Scott Devitt, an analyst with Stifel Nicolaus & Co. "Google is such a significant competitor. It can do damage to Yahoo."

Semel also defended the company's social media strategy during the call, touting services such as photo sharing site Flickr, "social search" engine Yahoo! Answers and the recent acquisition of blogging tool MyBlogLog.

Susan Decker, Yahoo's chief financial officer, added that Yahoo was "cautiously optimistic" about how it will do in 2007 and that the company expected to increase its lead in so-called display advertising, which include banner ads and video ads.

Decker, as a result of the management shake-up last month, will complete move into a new full-time role working more closely with advertisers once her replacement is found. Semel said that the company is continuing its search for a new CFO.

Shares of Yahoo initially fell as much as 3 percent after the earnings were released but the stock rallied following Semel's upbeat comments about Panama and were trading as much as 6 percent higher after-hours. The stock dropped 1.7 percent in regular trading on the Nasdaq Tuesday.

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

The reporter of this story owns shares of Time Warner through his company's 401(k) plan.