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Momentum Deserts Yahoo!

Shares sell off as Wall Street abandons an optimistic stance.

Updated from 7:31 a.m. EDT



shares tumbled early Wednesday after the Net giant disappointed investors yet again.

The Sunnyvale, Calif., company beat so-called adjusted profit targets and offered guidance that was in line with Wall Street targets. But shares slipped more than 11% to $28.41 in early Wednesday trading, giving back roughly half of this year's gains as investors mulled over a weak revenue performance.

CEO Terry Semel also warned of reduced expectations in the Net giant's key display advertising business.

Back in January, on the company's fourth-quarter earnings call, Semel promised that Yahoo! intended to "outpace the industry" in 2007 on display-ad growth. But on Tuesday, Semel said the company expects merely to keep pace with rivals.

Though the new guidance would mark a scaling back of "only couple of hundred basis points," Yahoo! CFO Sue Decker said in an interview, the shift marks yet another black eye for Yahoo!, which disappointed Wall Street serially last year, earning its shares a nearly 40% drop.

Decker said that Semel's comments would put Yahoo!'s forecast more in line with what it had previously put out after the third quarter of 2006.

Jefferies cut its price target to $36 from $38, saying the quarter "leaves something to be desired."

For the quarter ended March 31, Yahoo! made $142 million, or a dime a share, down from the year-ago $160 million, or 11 cents a share. Excluding certain costs, earnings were 17 cents a share.

Net revenue, excluding the money Yahoo! shares with its advertising partners, rose to $1.18 billion from $1.09 billion a year earlier.

Analysts surveyed by Thomson Financial were looking for an 11-cent profit on net revenue of $1.21 billion.

"Our first quarter financial results reflect solid execution against our plan," said finance chief Sue Decker. "We maintained strong profitability and cash flow, while remaining focused on building innovative products and services for our large and growing base of users, advertisers and publishers."

Yahoo! guided essentially in line for the second quarter and year. For the next quarter, Yahoo! said it expected revenue of $1.2 billion to $1.3 billion, against the $1.28 billion Wall Street target. For the year, the company said it expects revenue of $4.95 billion to $5.45 billion, against the Thomson consensus of $5.3 billion.

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Yahoo! shares had risen 26% this year going into Tuesday's postclose report, as the company appears to have finally gotten a handle on its much-discussed Project Panama advertising project.

Strong reviews for the Panama ad-ranking system, which debuted in February, had led to increasingly bullish sentiment. And while Yahoo! management has said that it does not expect the financial impact from Panama to be felt until the second half of 2007, investors seemed to be lining up in anticipation.

Still, CEO Terry Semel remains on the hot seat following last year's nearly 40% plunge, which came amid repeated financial shortfalls and various other setbacks, many to hard-charging rival Google.

During 2006, the company also saw a steady exodus of top executives from its ranks. And in the fourth quarter, the company announced a dramatic restructuring of its top ranks and a reorganization into three new business units.

Adding to the pressure on Yahoo!'s stock is the premium value it continues to fetch in spite of the company's competitive problems against Google. Yahoo! shares trade at 44 times earnings estimates, a rich multiple indeed for a company whose latest quarter showed single-digit revenue growth across the board.

During the company's conference call for investors, Yahoo! also announced that it had extended its partnership with


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to include a payment feature incorporating the auction giant's PayPal payment service.

Yahoo! also said that it began introducing its new ad-ranking system overseas, with a rollout starting Tuesday in Japan.

When asked about rival Google's recent acquisition of ad technology firm


, Yahoo! Semel said that it lent credence to Yahoo!'s approach. The move is intended to make Google a player in the display ad market where Yahoo! is dominant.

"It validates Yahoo!'s strategy for the past few years. We have always thought

display advertising was a very important part of advertising," Semel said. "We are happy to see others coming to that table."