Yahoo 2008 – Rocky Balboa or Mr. T?

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Will 2008 Be Year No. 1 Web Property Makes Turnaround?

Yahoo (YHOO) could find more tribulation than tidings of joy ahead as it enters 2008 as the world’s most popular destination for Web users — and least popular among investors.

Hoping for a continued rebound in online advertising, the Web’s top portal will have to cope with the growing Google (GOOG) juggernaut and Microsoft, (MSFT) which is marshaling its considerable resources to get a bigger foothold in the business.

Step one for Yahoo is bolstering its display ad business, which accounts for 45% of the company’s total revenue.

“The challenge for Yahoo coming into 2008 is that their salespeople have to convince their advertising accounts about the value of the property and reflect that in a better growth rate,” said Martin Pyykkonen, an analyst for investment bank Global Crown Capital.

Yahoo ended November as the most visited property online with 136.1 million visitors, according to comScore Networks. The company’s portal — which links to its own shopping, sports, news, real estate, finance and other services — attracts more Web surfers than any other company.

Visitor Count Up Just 5%

But it has fared worst among the big three Web portals on Wall Street in 2007.

Yahoo’s stock is down 7% for 2007, while Google’s up 54% and Microsoft’s up 22%.

Yahoo’s visitor traffic in November grew by just 5% a year vs. the same month in 2006. Google’s sites, which include its leading search service, ranked second with 131.5 million unique visitors in November, up 21% from a year ago.

Yahoo leads in how much time consumers spend on the site and how many pages consumers view. But total minutes spent on Yahoo declined 13% in November. Total pages viewed dropped 8%.

Time spent on other portals such as Time Warner‘s (TWX)AOL and Microsoft also declined 5% in the past year, comScore reported.

Google visitors, meanwhile, spent almost 13 million minutes on Google properties in November, up 116% from a year ago.

Analysts say declines in minutes and page views are indicative of consumers no longer using portals as the port of entry on the Internet.

That change in consumer behavior, coupled with competition for ads from social networking sites like News Corp‘s, (NWS)My-Space.com and Facebook, are causing advertisers think twice about where they should place their display ads, Pyykkonen says. (See relates story, this page.)

“People used to go to a main portal to find what they were looking for,” he said. “Now you have a much smarter Web user who goes to other sites directly. So advertisers recognize that, and therefore they are targeting more specific places to place their display ads.”

But some analysts argue the visitor traffic issue is still a glass half full for Yahoo.

Even with a drop in minutes, consumers are still spending more time on Yahoo than on other sites. That’s a big selling point for advertisers, says Sue Feldman, analyst for IDC, a research firm.

“I really feel that we overuse percentages (growth) when we report things,” she said. “The fastest-growing company grew at 125%, but all they made was $5 million. People still spend more time on Yahoo than they do on Google, which means a lot to an advertiser.”

In October, Yahoo beat analysts’ third quarter forecasts, earning 11 cents a share on sales of $1.28 billion, not counting traffic acquisition costs, or fees it pays to partner Web sites that carry its ads. While the earnings figure fell from the year-ago figure, it beat views by three cents and sales were up 14% over the year before.

Yahoo has credited the results to a resurgence in its display ad business and its newly launched search ad business, called Panama.

It was the first full quarter with Yahoo co-founder Jerry Yang in the CEO seat, replacing Terry Semel, who had served in the position since June 2001. Semel’s departure followed two quarters of mixed results and a poor outlook.

This quarter, analysts expect Yahoo to report a profit of 11 cents a share, down from 16 cents a year ago. Sales, minus traffic acquisition costs, are expected to come in at $1.40 billion vs. $1.23 billion in the year-ago period, says Thomson Financial.

What About AT&T Pact?

Even with its solid third quarter performance, many investors remain wary of Yahoo, says David Garrity, an analyst with investment bank Dinosaur Securities.

“There is an abundance of question marks for investors to consider with Yahoo, and as a result we have seen the shares under some pressure,” he said.

One big question is whether Yahoo will renew its partnership with AT&T (T). The two sell a high-speed Internet access service bundled with Yahoo services. The current agreement, in which the two companies share access fees and ad revenue, ends in April.

Published reports in March said that AT&T was questioning the effectiveness of the partnership.

While it wouldn’t necessarily be a deathblow, losing AT&T as a partner is a cause for concern for Yahoo, says Mark Mahaney, analyst for Citigroup.

“It could be $300 to $400 million of revenue (in 2008) coming from that deal for Yahoo — that’s access fees and advertising,” he said.

Yahoo, though, has several other revenue irons in the fire that could heat up in 2008.

For one, analysts expect more revenue from Panama as Yahoo improves the search-ad service.

The company also has ad partnerships in place with eBay, (EBAY) the Web’s leading online auctioneer and more than 400 newspapers in the U.S.

Yahoo could also cash in on its acquisition of Right Media, which operates an ad exchange network that helps match unsold Web pages with advertisers. Yahoo, which had a 20% stake in the firm, bought the remaining 80% in April.

In September, Yahoo acquired BlueLithium, which helps deliver display ads based on sites that Web users visit. It paid $300 million.

BlueLithium, in particular, could prove very valuable to Yahoo, says Sandeep Aggarwal, analyst for Oppenheimer & Co.

“If Yahoo is able to implement behavioral targeting capabilities to its existing ad inventory and provide this offering to advertisers it can start charging somewhere between 5% and 15% more for display ads,” he said.

Compliments of Investors Business Daily (IBD)

http://www.investors.com/editorial/IBDArticles.asp?artsec=17&issue=20071227

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