Yahoo! Q4 profits fatter than expected

Yahoo! posted fourth-quarter profits yesterday that were down more than 60 per cent from a year ago, on higher employee stock options costs and lower investment gains, but still handily beat Wall Street forecasts.

Chief executive Terry Semel said on a conference call with analysts: "We ended the year on a strong note with solid growth in revenues and operation cash flow, strong profitability and healthy growth in users and user activities."

Semel also said the new ranking model for Yahoo!'s new search marketing platform will be launched on 5 February, earlier than some analysts had expected. It will allow search ads to be ranked by quality, as Google does, and not just keyword bid price. Panama will begin rolling out to international markets in the second quarter, starting with Japan, and Yahoo! expects to start seeing a positive impact on its financials from Panama in the second quarter, Semel said.

He said: "We said we would be resolute about improving search monetisation and we are making exciting progress. For our US advertisers, I'm happy to report that we have successfully transitioned the large majority of our revenue to our new search marketing system known as 'Project Panama'.

Meanwhile, Yahoo! continues to be the leader in display advertising, with strong sales from financial services, consumer packaged goods makers and pharmaceutical companies, according to Semel.

Net income for the quarter ended 31 December, 2006, was $269m, or 19 cents per share, including stock-based compensation expenses, compared with $683m, or 46 cents per share, a year ago.

Revenue rose to $1.7bn. Excluding traffic acquisition costs, which are fees shared with content partners, revenue was $1.2bn. Revenue a year ago was $1.5bn, or $1bn excluding traffic acquisition costs.

Analysts polled by Thomson Financial were expecting Yahoo! to post fourth-quarter profits per share of 13 cents, including stock-based compensation expenses, and revenue of $1.22bn, excluding traffic acquisition costs.

Yahoo!'s own forecast was for revenue between $1.145bn and $1.265bn for the fourth quarter.

Yahoo! executives are "cautiously optimistic" about the company's business outlook, said chief financial officer Susan Decker. First-quarter revenue excluding traffic acquisition costs is expected to be in the range of $1.12bn to $1.23bn and for the full year it is projected to be between $4.95bn and $5.45bn, she said. Before the call, analysts were forecasting first-quarter revenue of $1.26bn and 2007 revenue of $5.47bn.

Yahoo! announced a reorganisation in which it aligned into three units overseeing consumer products, advertising and technology. Decker was promoted to head up the revenue-generating advertising group, and chief operating officer Dan Rosensweig and Yahoo! entertainment chief Lloyd Braun left the company. The company is searching for a new chief financial officer to replace Decker.

Yahoo! had a rough 2006 with slower ad sales dragging down profits last quarter and the delay of Panama, which was designed to help it better compete against Google.

Yahoo!'s share price rose nearly six per cent in after-hours action, rising to $28.57 from a close of $26.96 before the profits were announced. The share price has dropped more than 20 per cent during the past year.

The number of web searches on Yahoo!'s engine has risen more than 30 per cent in the past year, giving the company nearly 24 per cent market share, according to Nielsen/NetRatings. Google's share is 50.8 per cent.

Yahoo! is expected to capture 15 per cent of the search advertising revenues, while Google is expected to snare nearly 67 per cent, according to a report issued by eMarketer.

Elinor Mills writes for CNET News.com