Yahoo's Project Panama Back on Track

Its prized project for targeted advertising is off the ground. But Yahoo must do more to chase the kind of growth its rivals deliver

by Catherine Holahan

Investors were willing to look past a report showing that Yahoo's sales growth slowed in the third quarter. They were even willing to forgive a forecast for fourth-quarter sales that will miss analysts' predictions.

What they were really after was news on a project Yahoo! (YHOO) calls Panama, and on that score, Yahoo didn't disappoint. Project Panama is designed to improve the way Yahoo matches advertisements to the subject of search queries—a move that could translate to higher sales—and it hit snags earlier this year.

But on Oct. 17, when the company released third-quarter results, Yahoo said the project has finally gotten off the ground. Phew. In extended trading, Yahoo stock rose almost 3%, to $24.83.

TARGETED QUESTIONS

Investors were eager for some good news from Yahoo. The company had said in September that third-quarter earnings would come in at the low end of its forecast range due to softening in financial and automotive advertising (see BusinessWeek.com, 9/21/06, "Yahoo's Ad Slump"). It reported revenues, excluding traffic acquisition costs, of $1.12 billion for the third quarter, a 20% increase over 2005. That was in line with Wall Street's average estimate of $1.14 billion and on target with the bottom end of the $1.12 billion to $1.23 billion Yahoo initially expected.

During a conference call with analysts, Yahoo said fourth-quarter revenue would be $1.15 billion to $1.27 billion. Wall Street was banking on $1.31 billion. Says Caris & Co. analyst Tim Boyd: "They did disappoint more than the estimates said. People are going to want to know what happened."

What happened: Advertisers increasingly want targeted advertising, which tailors ad placement more specifically to users' habits. Yahoo has lacked a highly targeted advertising platform, making it vulnerable to a slowdown in the economy that has yet to affect, and may never affect, main competitor Google (GOOG). In an Oct. 17 note to investors, Cowen & Co. analyst Jim Friedland wrote that advertisers are more likely to cut back on general display ads when sales are tight than to reduce targeted ads that are more likely to generate sales. Yahoo relies on display advertising for about 40% of its revenue. "We believe [Yahoo] is more exposed to an economic slowdown than Google," Friedland wrote.

THREE-PRONGED PLAN

Yahoo is also suffering from more competition from new social-networking sites that provide both cheaper advertising platforms and desirable young audiences. News Corp.'s (NWS) MySpace, Google's recently acquired YouTube, and Facebook all are giving Yahoo a run for its money (see BusinessWeek.com, 10/16/06, "High Hopes Abound for High Tech").

During the conference call, Yahoo CEO Terry Semel acknowledged that the company needs to provide more targeted advertising and said that it is confident Panama will have the necessary results. "I am not satisfied with our current financial performance, and we intend to improve it," Semel said. "We are not exploiting our considerable strengths as well as we could be, and we are committed to doing better."

Semel outlined a three-pronged plan to improve Yahoo's revenues. The company's first objective, Semel said, is to close the gap with Google in its ability to make money off of search advertising. In addition to Panama, the company announced two new relationships with advertising technology companies that should further that goal. Yahoo acquired AdInterax, a provider of rich media advertising tools, for an undisclosed sum.