Yahoo closed the books on a tough year yesterday, reporting that its sales rebounded in the fourth quarter from an especially sluggish third quarter and promising investors that it would soon turn on technology that it hoped would close the widening gap with Google.
Its fourth-quarter profits were down from a year ago when it had investment gains, however, and it predicted only modest improvements for this year, suggesting that Yahoo would continue to struggle to keep up with Google, its Silicon Valley rival.
Yahoo executives were upbeat enough, however, that Yahoo’s shares rose by 5.8 percent, or $1.57, in after-hours trading, to $28.53. The price had fallen 46 cents, to $26.96 in regular trading.
Of most significance to investors, Yahoo said it would begin the second phase of its long-delayed search advertising system, called Project Panama, on Feb. 5. On that day, it will start displaying advertising on search pages in the order in which its computers estimate it will make the most money.
Search advertisers bid the price they are willing to pay each time a user clicks to visit their Web sites. Yahoo now shows the highest bid first, a method that analysts say earned it only 60 percent as much on each search as Google’s more sophisticated formula. Terry S. Semel, Yahoo’s chief executive, said the company would reap the rewards of the new system — but slowly.
“The first time we see any benefit will be at the end of the second quarter,” he said in an interview yesterday. “Every quarter thereafter we will start to get better.”
Mr. Semel said Yahoo would not see the full impact until 2008, when the system will be expanded to international markets.
In the fourth quarter, Yahoo earned $268.7 million, or 19 cents a share, down from $683.2 million, or 46 cents a share, in the period a year earlier. In the fourth quarter of 2005, Yahoo’s earnings were buoyed by $408 million in accounting adjustments relating to the sale of its Chinese unit and some tax changes. Excluding those adjustments and some expenses related to stock-based compensation, Yahoo’s fourth-quarter income in 2006 was $296.5 million, up 15 percent from the prior year.
Yahoo predicted another slow year of growth. The company’s revenue, after deducting payments it makes to Web sites that display the ads it sells, was $4.56 billion for 2006, an increase of 23 percent over 2005. (The growth was slower than the company had predicted at this time last year.) For next year, it predicts net revenue of $4.95 billion to $5.45 billion, an increase of 8.6 percent to 20 percent.
It also expects the growth rate in operating cash flow, a measure of profitability, to slow as well.
By contrast, Google is expected to announce next week that its 2006 net revenue was up 85 percent, to $7.45 billion. And analysts expect its net revenue to increase 48 percent this year.
For the fourth quarter, Yahoo reported revenue, excluding payments to other sites, of $1.23 billion, up 15 percent. Yahoo’s revenue was slightly higher than analysts’ expectations of $1.22 billion. Its per-share earning of 19 cents in the quarter was well ahead of the 13 cents expected by Wall Street.
As Yahoo has fallen further behind Google, there has been increasing criticism of Mr. Semel’s leadership as slow, indecisive and unfocused. In response, last month Mr. Semel reorganized the company’s management, placing responsibility for advertising sales and some other business under Susan L. Decker, formerly the company’s chief financial officer.
In a conference call with investors, Ms. Decker said that Yahoo planned to rebuild its business of selling advertising for other sites, both text ads related to Web searches and graphic banner ads. In recent years, Yahoo has lost its early lead in the search ad business to Google. And while it is still the largest seller of display advertising on its own site, AOL’s Advertising.com unit has become the largest network selling graphical display advertising for other sites.
Mr. Semel said the Panama system would allow advertisers to buy both graphic and search advertising at one time, something that Yahoo had not allowed until now.
“Large advertisers want to talk about display advertising and search at the same time in the same meeting,” he said.
Mr. Semel said that Yahoo was buying advertising space on other sites on behalf of its large customers, using an advertising marketplace run by Right Media.
Yahoo is looking to sell ads on other sites in part because the growth of its own user base is slowing. Yahoo increased its user base in 2006 by 16 percent, to 423 million people worldwide, but the growth rate of users in 2005 was 22 percent. Yahoo’s users are looking at more pages than they did a year ago, but the company’s advertising revenue for each page displayed declined, it said, mainly because of its lagging search ad technology.
In the United States, Yahoo’s revenue grew to $1.15 billion in the fourth quarter of 2006, an increase of 8 percent from the quarter a year ago. By contrast, the company’s strong business in Asia helped its international revenue grow at a 25 percent pace, to $558 million.
Correction: January 25, 2007
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