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Yahoo's Got Panama Pressure

Yahoo's  weak first quarter results did more than disappoint Wall Street.

With a profit drop of 11 percent to $142.4 million, on revenues of $167 billion, up 7 percent, and earnings per share coming in at 10 cents compared to 11 cents in the same time last year, Yahoo is feeling even more pressure to get its new Panama ad platform in line to deliver better revenues and help put the portal company on stronger footing with Google.

Shares of Yahoo tumbled by 11 percent to $28.31 during regular trading today following its earnings results last night. But not every analyst piled on that Yahoo is in big trouble, or that CEO Terry Semel better fix things -- or else.

"My take was they were making steady, but very slow progress on the things they were working on and that they were justified with their exuberance with their relationships with their distribution partners," said David Card, vice president and senior analyst for Jupiter Research.

Despite the disappointment investors felt over Yahoo's earnings results, they at least had the comfort of knowing Yahoo's migration to the new advertising platform went off smoothly during the first quarter.

Semel and other company representatives had repeated that statement during the past few months, but Wall Street chose instead to believe in what could have been ridiculous reports of success, including rumors of a 40 percent improvement or other similar speculations, said Card.

"Yahoo is living it up to its own guidance. It's doing exactly what is said it would. But there was an opinion out there [in Wall Street] that it was going to accelerate faster and that Yahoo was down playing things to set expectations so they could appear to do better." he said.

The earnings dip is an expected result of the migration process, he continued. "They're fine-tuning things, so part of the problem is who is in the network and how do people get the best value out of the network. Yahoo is fine-tuning the whole system and its customers are fine-tuning how they use the system. Yahoo is also cleaning out some [undesirable] affiliates. They're getting the kinks out of the engine and that's why things are declining."

That said, Wall Street's focus on Panama as a bellweather for Yahoo! is correct. "It's a major priority. They still are the leading portal and they have a loyal audience, which means they still have a very rich environment to sell to, but what they are being compared to is Google."

In terms of its features, Panama is about catching up to Google rather than offering anything unique. The advertising tools are seen as easier to use. It also changes the page rank algorithm.

Panama replaces Yahoo!'s timeworn "highest bid wins" model with a system similar to Google's that factors in ad quality and click-through rates. New tools will also help advertisers adjust and prune their ad content in order to focus their marketing approaches.

During yesterday's conference call to discuss earnings results, Semel touted Yahoo's ad distribution deal with MTV and a renewed contract with Viacom as strategic deals that have potential.

He mentioned the recent agreement with eBay to make PayPal the exclusive provider of its online wallet, while becoming the sole distributor of eBay's graphical ads. He also referred to the company's agreement to share advertising with McClatchy Co. and four other newspaper publishers. Other recent deals are all part of Yahoo's success in the display advertisement market. But the company's position will have to evolve, say analysts.

According to Jim Friedman, analyst with Cowan and Company, the display advertisement market is expected to grow 20 percent over the next year. Yet analysts wonder if this will be the case. Yahoo has been selling display advertising mostly on its premium inventory — its front page and front section pages, for example. "They've got to accelerate on making more money off the remnant inventory," Card said.

"While they're doing fine on their premium inventory their showing lots, lots more pages on other areas like Mail and Answers, meaning run-of-site or social media pages. They need to make that inventory more valuable by targeting it better. That inventory is cheap because there is so much of it out there," Card said.

Friedman agrees. "We believe advertisers are increasing spend on niche content sites, such as MySpace, Friendster, and YouTube, at the expense of Yahoo."