Yahoo profit drops but beats Street estimates

"We ended the year on a strong note with solid growth in revenues and operation cash flow, strong profitability and healthy growth in users and user activities," Chief Executive Terry Semel said on a conference call with analysts.

Semel also said the new ranking model for Yahoo's new search marketing platform will be launched February 5, earlier than some analysts had expected. It will allow search ads to be ranked by quality, like Google does, and not just keyword bid price. Panama will begin rolling out to international markets in the second quarter, starting with Japan, and Yahoo expects to start seeing a positive impact on its financials from Panama in the second quarter, Semel said.

"We said we would be resolute about improving search monetization and we are making exciting progress," he said. "For our U.S. advertisers, I'm happy to report that we have successfully transitioned the large majority of our revenue to our new search marketing system known as "Project Panama."

Meanwhile, Yahoo continues to be the leader in display advertising, with strong sales from financial services, consumer packaged goods makers and phamaceutical companies, according to Semel.

Net income for the quarter ended December 31, 2006, was $269 million, or 19 cents a share, including stock-based compensation expenses, compared with $683 million, or 46 cents a share, a year ago.

Revenue rose to $1.7 billion. Excluding traffic acquisition costs, which are fees shared with content partners, revenue was $1.2 billion. Revenue a year ago was $1.5 billion, or $1 billion excluding traffic acquisition costs.

Analysts polled by Thomson Financial were expecting Yahoo to post fourth-quarter earnings per share of 13 cents, including stock-based compensation expenses, and revenue of $1.22 billion, excluding traffic acquisition costs.

Yahoo's own forecast was for revenue between $1.145 billion and $1.265 billion for the fourth quarter.

Yahoo executives are "cautiously optimistic" about the company's business outlook, said Chief Financial Officer Susan Decker. First-quarter revenue excluding traffic acquisition costs is expected to be in the range of $1.12 billion to $1.23 billion and for the full year it is projected to be between $4.95 billion and $5.45 billion, she said. Before the call, analysts were forecasting first-quarter revenue of $1.26 billion and 2007 revenue of $5.47 billion.

Yahoo announced a reorganization in which it aligned into three units overseeing consumer products, advertising and technology. Decker was promoted to head up the revenue-generating advertising group, and Chief Operating Officer Dan Rosensweig and Yahoo entertainment chief Lloyd Braun left the company. The company is searching for a new chief financial officer to replace Decker.

Yahoo had a rough 2006 with slower ad sales dragging down earnings last quarter and the delay of Panama, which was designed to help it better compete against Google.

Yahoo's share price rose nearly 6 percent in after-hours action, rising to $28.57 from a close of $26.96 before the earnings were announced. The share price has dropped more than 20 percent during the past year.

The number of Web searches on Yahoo's engine has risen more than 30 percent in the past year, giving the company nearly 24 percent market share, according to Nielsen/NetRatings. Google's share is 50.8 percent.

Yahoo is expected to capture 15 percent of the search advertising revenues, while Google is expected to snare nearly 67 percent, according to a report issued Tuesday by eMarketer.