Yahoo!'s Shares Fall

Net revenue, excluding the money Yahoo! shares with search-advertising partners, rose 20% from a year ago to $1.12 billion.

Analysts surveyed by Thomson Financial were looking for an 11-cent profit on net revenue of $1.14 billion.

"Although we faced unanticipated challenges in the third quarter," said finance chief Susan Decker, "we continued to generate strong year-over-year increases in both revenue and free cash flow, on top of an already very large base."

But in a conference call held after Yahoo! announced earnings, Decker said a slowdown in advertising spending first announced by the company earlier in the quarter may be felt beyond the initial automotive and financial sectors originally mentioned. She didn't identify any particular sectors that were witnessing a slowdown, however.

The company forecast fourth-quarter revenue of $1.15 billion to $1.27 billion, below the $1.31 billion Wall Street target.

The sluggish guidance means that the stock will not have much upside in the fourth quarter, but holds promise in 2007, provided that Project Panama stays on track, according to some investors. "It's down or dead money for a little while," said Mike Binger, who helps manage Thrivent Financial and owns shares of Yahoo. "But if Panama is good and companies start using it, the growth rate for Yahoo ratchets up again."

The response from prospective customers is promising so far, said Yahoo! COO Dan Rosensweig. "We have previewed it with people in the industry, and the comments are excellent with regard to what we have been able to produce," he said in an interview.