No Earnings Joy Yet from Yahoo!’s Panama

Observers who were hoping for good news right away from Yahoo!’s Panama rollout were disappointed yesterday when the company reported that Q1 2007 profits were off 11% from the same time last year.

The company reported earnings of $142.4 million for the first three months of this year, compared to $159.9 million in profits in Q1 2006. However, quarterly revenues rose 7% year over year to $1.67 billion. Minus the amount Yahoo! paid out to ad partners, net revenue was $1.18 billion for the quarter.

The news was a letdown because analysts had expected revenue after those acquisition costs to be about $25 million higher. Most of that expectation grew out of reports that the new Panama auction platform for pay-per-click ads —which went into full launch in early February-- was performing well for advertisers and would boost search ad sales.

Indeed, Panama was given some credit for the 7% increase in Yahoo! revenue. But per-search revenue fell by a corresponding 7% during the quarter, while traffic acquisition costs rose 2.2% in the U.S. and 7.6% overseas, eroding profitability.

Yahoo! CEO Terry Semel said in a conference after the earnings announcement that the company’s focus on improving search and broadening into other online channels had shown begun to show results in the quarter.

“We have been executing aggressively against our plans to improve our search monetization, strengthen our display advertising business, and seize the opportunities we see in emerging areas like social media, mobile and video,” he said. “We continued to make good progress on all those efforts during the first quarter of this year…We know there is still much more to do and room for more continued growth across our business.”

Semel said Yahoo! expects Panama to start having a financial impact in Q2 2007 and to build momentum through the rest of the year.

Semel also revealed that Yahoo! has already launched the marketer interface portion of Panama to selected advertisers in Japan and this week will start inviting others in that market to make the transition. Marketers in South Korea and Europe will start moving to the interface later this quarter. Once that migration is accomplished, the company will turn on the bidding and quality-based ranking portion of the platform.

In the matter of its ad network, Semel said the display ad market is “going through a significant transition” with new inventory available from both new and established competitors—a veiled reference to Google’s $3.1 billion bid to buy DoubleClick, which counts Yahoo!’s network among its ad-delivery clients.

Semel pointed out that Yahoo! operates the largest display ad network in the industry and expects to grow as that market grows this year and to outpace the average in coming years. He mentioned recent deals to serve ads to Viacom’s 33 Web sites including MTV, VH-1, Comedy Central and BET and a partnership with the McClatchy newspaper chain to deliver display ads to their sites.

Speaking about the possible acquisition of DoubleClick by Google, Semel said the deal validates Yahoo!’s strategy of pursuing both search marketing and display ad businesses. But he was vague about what steps the company might take in regard to doing ad business with DoubleClick once it’s owned by a rival.

“As to how the individual advertisers will feel about working with DoubleClick [after a Google purchase], my guess is there will be some who are fine and there will be many who perhaps are not fine,” he said, adding that “competition benefits consumers and the whole industry, for that matter.”

Yahoo! has not yet come out asking for government antitrust scrutiny of the Google-DoubleClick deal as Microsoft and AT&T have done.

Acting CFO Susan Decker, who also heads a new division that works with Yahoo! advertisers and publishers, got a little more specific about the GoogleClick implications in a MarketWatch interview. There she said that the prospect of having to pay a division of Google for ad services (and to give Google some insight into Yahoo! ad performance through DoubleClick’s tracking) was “an interesting question that we plan to address soon.”

“It’s a different scenario, and we are wondering if it makes sense to [continue the DoubleClick partnership], but we haven’t decided yet what to do,” she said. Asked about the chances Yahoo! would stop dealing with DoubleClick, she said, “Our position is this is a natural evolution in the display ad market, one we anticipated and positioned ourselves for.”

Semel also made mention in yesterday’s conference of a new deal with PayPal, the automated online payment system owned by eBay. Under that deal, merchants who accept PayPal Express Checkout payments and also take part in Yahoo!’s Sponsored Search marketing program—in other words, buy featured listings in the onebox at the top of the results page for their keywords-- will get a small clickable shopping cart icon next to their listings so consumers can find them and shop them more easily.

“This will improve the shopping experience for consumers by providing our merchants and advertisers with a streamlined checkout process and improved lead conversion from a large base of active shoppers,” he said.

Decker told the conference audience that Yahoo! PayPal Checkout started yesterday with 2500 merchant members. The two companies are offering special deals to participating merchants, such as no-cost PayPal transaction processing through the end of this year and a $100 credit toward Yahoo! search ads.