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Yahoo!'s Panama Pain

Jonathan Berr

Yahoo! (YHOO Quote) CEO Terry Semel signaled that he intends to stay the course even as his handling of a big technical setback drew slings and arrows from Wall Street.

In an interview with TheStreet.com after Tuesday evening's earnings debacle, Semel says he's not concerned that a much-anticipated search engine upgrade will face further delays. The comments came ahead of Wednesday's open, which saw Yahoo! shares plunge 18% to a two-year low.

The selloff was spurred in part by the latest round of soft numbers out of Sunnyvale, Calif., and in part by the company's handling of the news of its technical problems.

The search engine improvements, nicknamed Project Panama, are now slated to begin rolling out in the fourth quarter instead of the third. Wall Street had hoped Project Panama would help Yahoo! close the gap with rival Google (GOOG Quote) in the lucrative and fast-growing search advertising market. But analysts were frustrated Tuesday by what they called Yahoo!'s failure to explain why the project was delayed.

"We feel very good about the revised time frame," says Semel in an interview Tuesday. "I'd rather give our guys the extra little elbow room to make sure that everything is perfect and that everything is in sync."

Semel adds that he has no plans to change the team running Project Panama, saying "they are doing a brilliant job."

Semel might be hard-pressed to find investors who agree with that point of view right now. At Wednesday's levels, Yahoo! stock is down 32% this year.

"A lot of people were looking for this launch to be a nice catalyst going into the third-quarter results," says Scott Kessler, an analyst with Standard & Poor's who cut his rating on Yahoo! to hold from buy, in an interview.

RBC Capital Markets analyst Jordan Rohan, who rates Yahoo! shares outperform, was even blunter. He argues in a note to clients Wednesday morning that Yahoo! management lost "credibility due to the delay." Rohan reduced his price target from $40 to $33 and trimmed his 2007 earnings per share estimate by a nickel to 78 cents.

"The problem that exists with Yahoo! today is that in its zealous pursuit of secrecy related to Project Panama -- which in our opinion is a bit of a misguided pursuit -- the company caught investors off guard," Rohan writes. He says the stock reacted to "poor investor communications around a reasonably explainable slip in a product release schedule." His firm makes a market in Yahoo! shares.

Data from comScore continue to show that Google is gaining market share at the expense of Yahoo! and its other rivals on a year-over-year basis. Yahoo! says comScore's data aren't accurate.

Analysts aren't quite ready to give up on Yahoo! quite yet, because the company is continuing to benefit from the shift of advertising dollars online. For its quarter ended June 30, the company made $164 million, or 11 cents a share. Revenue, excluding the money Yahoo! shares with search-advertising partners, rose 28% from a year earlier to $1.12 billion. Analysts surveyed by Thomson Financial expected a profit of 11 cents on sales of $1.14 billion.

"Despite the delay in the upgrade of its search advertising platform, and declining search market share, we expect Yahoo! to benefit from the secular growth trend in online advertising, driven by its dominant position in graphical advertising," writes Cowen analyst Jim Friedland, who maintains his outperform rating, in a note to clients. Cowen also makes a market in the shares.