Yahoo! Profits Down in Q3, but Panama’s Open for Business

Yahoo! yesterday reported a 37% decline in net income for third-quarter 2006 and warned to expect more of the same in Q4. But the search company also announced that it has already begun inviting U.S. search marketers to try its Project Panama search campaign management platform, an innovation that, once completely rolled out in Q1 2007, should start attracting new advertisers and bulking up ad spending on its network.

Revenue for the quarter was $1.12 billion, compared to $932 million during the same quarter last year. That was in line with the lowered expectations Yahoo! announced at a Goldman Sachs analyst conference last month. At that time, Yahoo! attributed the falloff to weakness in the automotive and financial sectors which led to reductions in their spending on online display ads.

“I am not satisfied with our current financial performance, and we intend to improve it,” Yahoo! CEO Terry Semel said in a conference call following the quartering earnings announcement. “We’re continuing to grow our business at apace many companies would envy, and we continue to lead the industry in many key measures of performance. But that’s really not good enough for us. We’re not exploiting our considerable strengths as well as we should be, and we are committed to doing better.”

Phased rollout of the search ad platform upgrade was originally scheduled to begin in Q3, but Yahoo! pushed the launch of the first steps back to Q4. Thus yesterday’s announcement that some advertisers had already begun adopting the new application came a bit earlier than many observers had expected.

Specifically, Yahoo! is inviting selected advertisers to start using its new ad campaign management tools, including new geotargeting capabilities and search budgeting and forecasting features. Advertisers will also be able to gather related keyword campaigns into ad groups for more efficient management, the way they can now do on Google AdWords.

Still to come, and still on track for Q1 2007 in the U.S. according to the company, is the unveiling of the new Yahoo! ad marketplace design. This will add a quality ranking to search ads that will factor in their placement on search results pages, again like Google’s system. Observers who’ve seen the new marketplace say the quality index will take in an ad’s clickthrough rate, the keywords related to ad copy, the display URL and landing page, among other factors. Current Yahoo! advertisers will begin seeing a bar scale coded 1 to 5 in their ad management tools, giving them an idea of how that ad will be indexed under the new system.

Yahoo! will transition U.S. customers to the new platform on a market-by-market basis during the fourth quarter and into the coming year, Semel said yesterday. While migration to the new system will be mandatory, the company said it will bow to the wishes of advertisers who want to wait until after the holidays to make the changeover.

“This marks a significant turning point in our efforts to deliver additional value for advertisers, helping them better manage their campaigns to realize increased returns,” Semel said. “Additionally, through this platform we will be able to unlock the full potential of our large global user base and improve our search monetization capabilities.” Once the new ad platform has been deployed in the U.S., Yahoo! will begin phased rollouts in its international markets.

Semel said Yahoo! is also responding to changes in the display portion of the online advertising business — mainly the introduction of new ad inventory from fast-growing providers such as MySpace and YouTube, as well as many smaller publishers. Spending reductions by some display ad clients and the long-expected end of Yahoo!’s ad relationship with MSN depressed revenues in this segment, Semel said.

To increase the yield from display ads, Yahoo! announced yesterday that it has taken a 20% investment stake in Right Media, an online exchange for buying and swelling ad inventory. Yahoo! will join the exchange and let advertisers bid on its “non-premium” ad inventory.

The company also announced an agreement to buy rich media advertising company AdInterax for an undisclosed sum. The purchase will let Yahoo! offer advertisers tools to create floating animations, expandable banners and streaming video ads, and to track the clicks, impressions, reach and frequency of those ads. Before this acquisition, Yahoo! has made those tools available to advertisers through relationships with third-party providers.

Semel also said the company would make investments in new audiences in three key areas: social media, video and mobile access. The social search feature Yahoo! Answers, photo-sharing site Flickr and social tagging site Del.icio.us, and Yahoo! Video “make us the leading force in social media today” with almost 100 million total users, Semel said, including about 30 million in the 15-to-24 age group.

“We’re convinced that the social media space will continue to grow and evolve, and we plan to continue to be a key player in this business,” he said.

But the conference contained no news about Yahoo!’s reported pursuit of social networking site Facebook, for which the company reportedly offered $1 billion a few weeks ago.

In video, Semel pointed to Yahoo!’s recent purchase of Jumpcut, a video-sharing site that provides online editing tools for creating movies, as evidence of the company’s determination to lead in the space. Yahoo! has also announced content deals with more than a dozen professional video providers, including one earlier this week to add local news clips from CBS stations in 16 U.S. markets.

“Our goal is to make video as ubiquitous as text throughout the Yahoo! network,” Semel said.

During yesterday’s earnings announcement, Yahoo! also said it would buy back up to $3 billion worth of its outstanding stock over the next five years.