Google's Yin to Yahoo's Yang

NEW YORK (CNNMoney.com) -- The two leading Internet search companies will report their second quarter results this week. And even though the Internet ad business is booming, the expectations for Yahoo! and Google could not be any more different.

Yahoo, which dumped Terry Semel as chief executive officer in June and replaced him with co-founder Jerry Yang, will release its earnings on July 17.

Investors want to hear what Yahoo co-founder and new CEO Jerry Yang's plan is to get the company back on track.

Shares of Google have soared since the company reported strong first-quarter results in April but Yahoo has stumbled after lowering guidance for the year.

Despite the launch of a well-publicized upgrade to Yahoo's search platform for advertisers, technology dubbed Project Panama, analysts expect Yahoo to report revenue, excluding ad sales it shares with affiliates, of $1.24 billion, just 11 percent higher than a year ago.

What's more, Wall Street is predicting that the company's earnings will be unchanged from last year, at 11 cents a share.

The company warned in April that its sales and earnings for the year would be weaker than it first thought and investors have punished Yahoo (Charts, Fortune 500) for its weak guidance. Shares have plunged 17 percent since the company lowered its forecasts.

Google, on the other hand, remains Wall Street's darling...and with good reason. The company will report its results on July 19 and analysts expect sales, excluding revenue shared with partners, of $2.68 billion, a 60 percent increase from a year ago. Analysts are forecasting a 44 percent increase in profits, to $3.59 a share.

Shares of Google (Charts, Fortune 500) have surged 17 percent since the company reported its first quarter results in April and the stock has hit several new all-time highs in the past few weeks.

Investors are excited about Google's prospects in not just search advertising, a market that it dominates, but display advertising (i.e. banners, videos and other graphical ads) as well. The company announced in April that is was buying DoubleClick, a leader in placing online display ads, for $3.1 billion.

So will the trend of Yahoo disappointing and Google delivering continue? Probably.

"It's going to be the status quo. Yahoo has been trying to compete with Google and losing," said Brian Bolan, an analyst with Jackson Securities.

Denise Garcia, an analyst with A.G. Edwards, said that Yahoo probably won't see any significant boost to its results from Panama just yet.

"This will be an interesting quarter. It's the first one that Panama has been fully in operation but I don't expect it increasing revenue per search by that much until the end of the year," she said.

But she did think that one wild card that could help Yahoo and slightly hurt Google is the fact that online auction company eBay (Charts, Fortune 500), which is Google's largest customer, pulled ads from Google for ten days last month.

Analysts said eBay's move was made to protest Google's decision to promote its Google Checkout product, which competes with eBay's PayPal, at a party near eBay's annual eBay Live! conference in Boston. Google later cancelled the event.

Garcia said Yahoo may have received a small boost in ad spending as the result of eBay "going dark" on Google.

Still, analysts said that display advertising has weakened at Yahoo, which is a worrisome sign since Google has yet to gain a substantial foothold in this market.

Sandeep Aggarwal, an analyst with Oppenheimer & Co., said Yahoo is now facing much tougher competition for display ads from popular social networking sites like News Corp (Charts, Fortune 500).-owned MySpace and privately held Facebook. That's led to an increased supply for display ad inventory, which in turn has driven down prices.

Meanwhile, Jackson's Bolan said that Google has been able to take advantage of growth in social networking more effectively than Yahoo since it inked a partnership last year that made it the exclusive provider of keyword ads on MySpace.

With all this in mind, analysts said it's highly unlikely Yahoo will beat earnings or revenue estimates for the quarter or raise guidance for the remainder of 2007. In addition, Aggarwal said Yang and Susan Decker, who has been promoted to president of Yahoo, must avoid setting expectations too high for the company.

"Even if they see signs of improvement, the last thing Yang and Decker want to do is overpromise and underdeliver," he said, adding that the best investors should hope for is that Yahoo reiterates its guidance and doesn't lower its forecast for 2007 again.

But Jeffrey Lindsay, an analyst with Sanford C. Bernstein, said investors do want to hear a concrete plan about what's strategically next at Yahoo, and not just announcements about reorganizations. Yahoo revamped its sales team shortly after Semel was ousted.

"The problem is that Yang and Decker are identified with the strategies of the past, which have led Yahoo to where it is now. What investors are looking for is something new and different," he said.

Google, of course, doesn't have to worry about overpromising or how the Street will react to future plans since the company famously does not give earnings or sales guidance and is usually tight-lipped about its strategy.

But Wall Street is betting that Google will once again beat estimates by a fairly substantial amount since the company has steadily gained market share in search.

Lindsay said Google also is benefiting from increased advertising at Google's Gmail and other products in Google's Apps business, a suite of free Web-based desktop services that includes calendars, spreadsheets and other offerings that compete with similar tools sold as part of Microsoft's (Charts, Fortune 500) Office desktop software package.

"Google is performing extremely well. It is gaining search share. In addition, new businesses seem to be doing well," he said.

Aggarwal added that Google might also start seeing some benefits from its acquisition of online video leader YouTube last year. He admitted that online video advertising is still a very small business for Google but that it could be the source of some revenue upside in the next few quarters.

Still, the risk for Google isn't as much that it won't beat estimates but that it won't beat by enough. To that end, Garcia said Wall Street will be keeping a close eye on how much Google's spending on capital expenditures, new products and sales and marketing will put a dent in profits.

"Meeting consensus estimates typically isn't enough for Google investors," she said. "The major concern with them is spending. People will be paying a lot of attention to that."

Analysts quoted in this story do not own shares of Google or Yahoo and their firms have no investment banking ties to the companies.