Yahoo's Profit Takes a Nosedive

Ad Business Falters Against Rival Google

Yahoo reported a 61 percent drop in quarterly profit yesterday, capping a year in which the online giant lost ground to Google, its biggest rival for online advertising.

Yahoo executives acknowledged that the company is trying to find its footing after a year that included a key technology delay, a corporate restructuring and relative weakness against its rivals in the online advertising business. This year, Yahoo and Microsoft hope to make big inroads in their fight against Google, which dominates search-engine advertising and continues to gain market share.

"I'm confident in our ability to capture new opportunities," chief executive Terry S. Semel said yesterday in a conference call with analysts.

Profit fell to $269 million in the fourth quarter, from $683 million in the fourth quarter of 2005. Revenue rose 13 percent, to $1.7 billion, during the quarter. For the full year, profit fell 60 percent, to $751.4 million.

The Sunnyvale, Calif., company is pinning hope for a financial comeback on a new search-engine-based advertising system called Panama. After delaying launch of the system for technical reasons in 2006, Semel said Panama would start to improve revenue in the second quarter this year.

Meanwhile, Microsoft has launched its program, adCenter, which allows advertisers to better target ads toward online customers.

"It's a very, very critical year" for both Yahoo and Microsoft, said Scott Kessler, equity analyst at Standard & Poor's. If their attempts to improve their advertising revenue fail, it may prompt another major reconsideration of their strategies, he said.

Yahoo is the first of the major Internet brands to report year-end financial results; Microsoft is scheduled to report tomorrow, and Google's report is due Jan. 31. Yahoo released its report after the stock market closed yesterday. Shares fell 46 cents, to $26.96.

Yahoo restructured its management team last month after a well-publicized leak of an internal memo criticizing the firm's lack of strategic focus. The memo said Yahoo was spread too thin as it tried to develop too many products across too many divisions.

One particularly troubling trend to Yahoo watchers is that the company is starting to lose its footing in display advertising, one of its strongest businesses. Yahoo, with 500 million users, still has the heaviest traffic of any Web site, but Kessler said popular social-networking sites such as MySpace and Facebook are cutting Yahoo's traffic and revenue growth.

Despite months of speculation that Yahoo was considering buying Facebook, there has been no deal. It was Google that struck a deal with MySpace to place ads on its site. Google also bought the video site YouTube for $1.65 billion last year.

"Yahoo chose to go it alone" against some of the new Web sites that incorporate video and social networking, Kessler said. Some of those sites are cutting into Yahoo's market share, "and very well may be doing the same when it comes to advertising," he said.

Some analysts hoped that Yahoo would turn a corner this year. In a report released last week, titled "Darkness before Dawn," Morgan Stanley analysts Mary Meeker and David A. Joseph wrote: "Often times things can appear at their worst just before they show marked improvement."