Yahoo closed the books on a tough year on Tuesday, 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.
Yahoo executives were upbeat enough, however, that Yahoo's shares rose by 5.8 percent, or US$1.57, in after-hours trading, to US$28.53. They had fallen US$0.46, to US$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 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 on Tuesday. "Every quarter thereafter we will start to get better."
Semel said Yahoo would not see the full impact until next year, when the system will be expanded to international markets.
In the fourth quarter, Yahoo earned US$268.7 million, or US$0.19 a share, down from US$683.2 million, or US$0.46 a share, in the period a year earlier. In the fourth quarter of 2005, Yahoo's earnings were buoyed by US$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 last year was US$296.5 million, up 15 percent from the year before.
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 US$4.56 billion for last year, 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 US$4.95 billion to US$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 net revenue was up 85 percent last year, to US$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 US$1.23 billion, up 15 percent. Yahoo's revenue was slightly higher than analysts' expectations of US$1.22 billion. Its per-share earning of US$0.19 in the quarter was well ahead of the US$0.13 expected by Wall Street.
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