Yahoo's Sickly Summer

By Yuki Noguchi
Washington Post Staff Writer
Wednesday, October 18, 2006

So what is ailing Yahoo? It announced another soft quarter yesterday at a time when the overall Internet ad market is widely seen as the picture of health.

Yahoo said its revenue growth had fallen behind that of its rivals, and it announced a new ad software system and two investments designed to help it catch up with online-ad leader Google Inc.

Yahoo Inc. still has the world's largest online audience for communications, news, entertainment and social networking services, and when its revenue tanked five years ago, it rebounded smartly.

But things were looking tough yesterday. It reported that third-quarter revenue was up 19 percent, to $1.58 billion, from the third quarter last year -- considerably below the general growth rate for Internet advertising, 37 percent in the first half of the year, according to the Interactive Advertising Bureau, a trade group.

"I am not satisfied with our current financial performance, and we intend to improve," Yahoo chief executive Terry S. Semel said in a conference call yesterday.

He said the lackluster growth would continue for the rest of the year.

Yahoo's quarterly profit fell to $159 million (11 cents a share), from $254 million (17 cents per share).

Yahoo's biggest advertisers had financial problems in the second half of the year, causing them to cut back unexpectedly on Internet ad spending, said Susan Decker, Yahoo's chief financial officer. Those advertisers included automakers and financial companies, Semel said.

Analyst Rob Enderle said that while Google has made bold and risky moves, Yahoo has been less aggressive. "Yahoo seems more tentative and less innovative," making it vulnerable to smaller search companies such as, he said. "You can get nibbled to death," he said.

Yahoo shares closed down 3 cents, to $24.15, before the earnings announcement. The stock is down considerably from its 52-week high of $43.66.

Yahoo's slowing ad growth seemed surprising because it comes at a time when many large companies are spending considerably more for online advertising, said Greg Stuart, chief executive of the IAB. Hewlett-Packard Co., for example, increased its online spending to 30 percent of its ad budget, compared with 10 percent last year, he said. Financial services company Fidelity is committing more than a third of its ad dollars to the Internet, Stuart said.

The disappointing results from Yahoo, which helped pioneer online advertising, reflects intensifying competition as the Internet siphons more advertising money from traditional media such as television, newspapers and magazines. Google, which generates the most ad revenue and processes the most number of searches on the Web, has been steadily widening its lead over Yahoo, which is No. 2 in advertising and search.

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