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Yahoo Shares Plunge On Slowing Ad Sales

Never underestimate the stock market's ability to overreact.

A mild warning of advertising softness in its current quarter from top Yahoo officials sent the company's shares down 12 percent in mid-day trading, and a lot of other tech stocks went down with it.

Yahoo  Chief Executive Terry Semel and CFO Susan Decker spoke at Goldman Sachs Communicopia conference in New York today.

Analysts asked Semel and Decker if any areas of advertising were starting to experience slowness as sectors of the economy have started to cool down.

Semel replied that there had been a slight slowing in growth of advertising from two of the largest sectors, automotive and financial services.

"When I say slowing, slowing compared to the additional growth that we would have anticipated we would have," he said.

"It's still very meaningful and still very important. So they are still growing, but they're not growing as quickly as we would have hoped at this moment of time."

Decker added that the company has seen this weakness in the last three to four weeks, and it would have an impact in the current quarter.

"We will probably deliver in the bottom half of the range that we put out for our financials on July 18, when we put out our Q3 estimates," she said.

The company reported its second quarter numbers on July 18, along with third quarter projections.

Yahoo estimated revenue between $1.11 billion and $1.22 billion, excluding commissions paid to marketing partners. Operating income was projected to be in the range of $445 to $505 million.

Decker added that it was still rather early to tell if this is a sign of anything broader that's economic, or whether it's just some categories making some adjustment.

Unfortunately, that wasn't good enough. Shares of Yahoo, which had been holding steady for the trading day, took a sudden nosedive, down 12 percent, to $25.33 in mid-day trading.

Yahoo's news also dragged down archrival Google , which lost almost four percent of its market value, down to $398.27. That came in spite of two new reports showing Google's share of the search market was up.

comScore, an Internet research company, showed Google held a 44.1 percent share of U.S. search queries, up from 43.7 percent in July. Nielsen NetRatings also showed an uptick for Google, at 50.2 percent, up from 49.2 percent last month.

Yahoo's stock has been beaten up rather badly in the past year.

The company's stock fell in January after the company miss analyst projections for its fourth quarter, and again in July after it delayed the release of an overhaul to its ad placement system.

That project, known as Panama, is on track for the first quarter of 2007, according to Decker. The new system will place ads based on relevancy in addition to how much the ad cost.

The key driver for Yahoo, Semel said during the conference, is not search, but e-mail.

"E-mail is number one for getting users, search is number two," he said. "It's not only one of the doors to the Internet, but we're happy to say even before this launch that Yahoo is clearly the number one e-mail company in the world."

A new e-mail client has been under development and public beta for a while now. Decker said Yahoo lead globally and in US with e-mail, with overall traffic up 20 percent in the last year.

Semel claimed 40 percent of time people spend online is communication, such as e-mail, VoIP  and instant messaging. Another 40 percent is spent on information and/or entertainment, 15 percent is commerce and only five percent is search.

"I think the blessing of Yahoo is we are heavily engaged in each of those areas on a global basis and we are there to provide great opportunities and great content to our users globally in each of the areas where they spend most of their time," he said.