Yahoo! Expects Lower Revenue on Ad Weakness in Key Sectors

Yahoo! said yesterday it is seeing a slowdown in ad growth in some product categories and expects Q3 revenue and earnings to come in at the low end of forecasts next month. The statement threw a scare into traders and a dip into the share prices of a swath of other ad-reliant Internet companies.

Speaking at a Goldman, Sachs analyst conference in New York, Yahoo! chief financial officer Susan Decker said the company has seen “a little weakness in the last three or four weeks” in ad revenues from auto manufacturers and the financial services sector. She characterized that weakness as “slower growth, not anything more material than that.”

Nevertheless, she said, the weakness will affect Yahoo!’s third quarter results, to be announced in mid-October. A report sent by Yahoo! to the Securities & Exchange Commission after Decker’s speech said the company “is likely to report results in the lower half of the business outlook ranges” forecast for the quarter back in July. At that time, Yahoo! predicted net earnings of $1.12 billion to $1.23 billion for the quarter ending Sept. 30 and operating income of $445 million to $505 million.

Asked whether Yahoo! was seeing weakness in both display and search advertising among advertisers in those categories, Decker said that since those industries were strong advertisers in both channels, the growth reductions were also showing up in both.

Yahoo! chairman and CEO Terry Semel, who also participated in the conference, stressed that the trend of ad revenue in those sectors was still positive. “We’re seeing some slowing in these sectors,” he said. “I mean slowing compared to the kind of additional growth that we would have anticipated that we’d have. It’s still very meaningful and very, very important. They’re still growing, but they’re not growing as quickly as we would have hoped.”

Nevertheless, the downbeat earnings forecast caused a 13% erosion in Yahoo!’s share price in the hours after the Goldman presentation. At trading close yesterday, Yahoo! shares were off 11.2% to $25.75. The announcement also led to drops in the share prices of other Internet companies that might also take a hit from a drop-off in online advertising, including Google, Amazon.com and eBay.

Earlier in the day, Barry Diller, chief executive of IAC/InterActive Corp., told the Goldman audience that his company’s Web media properties — which include search engine Ask.com — were also seeing a decline in advertising by financial companies during the third quarter.

According to some analysts, financial advertising accounts for 12% of all online ads (both display and search-related) while automobile advertising is estimated to comprise 10% of Internet ads.

The hints of slower growth in some segments of online advertising come against a backdrop of predictions of long-term expansion in Web marketing. The Interactive Advertising Bureau has said that online ad sales generated $12.5 billion in revenue last year, up 30% over the figure in 2004. And marketing research firm eMarketer is forecasting that online ad revenue will hit $16.7 billion this year and $29.4 billion in 2010.

The lowered expectations for Yahoo!’s third quarter come at a time when the company has already seen its stock price decline 26% this year. Most of that reduction came after what were considered disappointing Q2 results in July and lower earnings expectations for Q3 than most analysts had anticipated. At that time, Yahoo! announced that it would be pushing back the timetable for the introduction of its Project Panama search ad platform, a redesign that would both add new advertiser tools to the interface and introduce a quality ranking to deliver more relevant ads to search users.

The first phase of the Panama launch was originally scheduled for launch in Q3 2006, but the July announcement reset that start point for Q4. Right now, the Panama ad management interface is scheduled to launch in the U.S. by the end of this year, while the quality ranking system will have a U.S. rollout in Q1 2007. Asked if that timetable still holds, Decker told the Goldman conference that it did but stated twice that any revisions to the schedule would be announced in Yahoo!’s mid-October Q3 earnings call.

Asked about Yahoo!’s share of search market usage both at home and abroad, Semel said he’s “very proud of what our company has accomplished.” Data published yesterday by Nielsen//NetRatings pegged Yahoo!’s portion of the August U.S. search market at 24%, compared to Google’s 50.2%. Another estimate from comScore Networks found that U.S. searches from Yahoo! sites accounted for 28.7% of the market, against Google’s 44.1%.

Semel pointed out that simply maintaining its share in the face of Google’s overwhelming growth was an achievement for Yahoo! “We have fundamentally the same market share that we had when we began about two and a half years ago,” he told the Goldman audience. “I think that’s been a great accomplishment for us to have held our market share in a very competitive market when the gains of the other guy have been quite dramatic. Those gains have come 100% from a number of our other competitors. So I’m very proud of where we are, I think we’re doing a very good job, and we see good opportunities to keep growing.”