Yahoo shares down 18 per cent

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Yahoo shares fell more than 18 per cent in early trading in New York on Wednesday after it failed to impress Wall Street on Tuesday with second-quarter sales and profits slightly below expectations.

The internet company also reported a setback in introducing technology that would improve the relevancy and profitability of adverts appearing in search results, enabling it to keep up with its rival, Google.

Terry Semel, chief executive, said the new advertising technology, codenamed Project Panama, was being pushed back from the third to the fourth quarter to allow more testing of the product.

Analysts were told Panama remained a top priority but would not contribute to revenues this year.

Yahoo reported revenues, excluding costs paid to affiliates, of $1.123bn, 28 per cent higher than the $875m recorded in the second quarter of 2005. The consensus of analysts surveyed by Thomson First Call had been $1.138bn.

Earnings were $164m, or 11 cents a share, with Wall Street expecting 11-12 cents. Investors had been hoping Yahoo would boost technology and internet stocks by beating expectations, ahead of earnings from Google, Ebay, Microsoft and Intel this week.

Instead, its shares took a beating in early trading, falling 18.5 per to $26.25.

Yahoo said it recorded $457m in operating income and forecast a third quarter figure of $455m-$505m, which it said reflected seasonality. Revenues would be $1.115bn-$1.225bn, it suggested.

For the full year, it expects sales of $4.6bn-$4.85bn, up 28 per cent on 2005 based on the mid-point figure. Operating income was forecast at $1.915bn-$2.055bn, up 27 per cent.

“We continued to execute on our plan in the second quarter – delivering strong revenue growth, profitability and returns on our significant free cash flow,” said Susan Decker, chief financial officer.

Free cash flow was $358m, compared with $300m a year earlier. This was offset by $301m used for stock repurchases and $61m spent on acquisitions. It paid $60m for a 10 per cent stake in the Korean e-commerce company, Gmarket.

Yahoo is seeing stronger growth overseas. It reported a 23 per cent increase in US revenues to $1.07bn, while international sales were up 32 per cent at $506m.

The group depends on advertising for the bulk of its revenues. Marketing services sales were $1.386bn in the second quarter, compared with just $190m being produced by its fee-based services.

Yahoo’s share of search in the US is 28.5 per cent, according to May figures from the ComScore research firm, compared with 44.7 per cent for Google and 12.8 per cent for Microsoft’s MSN. Yahoo has a 20.6 per cent share worldwide.

Google reports second-quarter earnings on Thursday with analysts expecting net revenues of $1.631bn.

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