Updated from 8:01 a.m. EDT

The Street showed no inclination to forgive a sales misstep at




Shares of the Internet bellwether remained under heavy selling pressure, recently trading at $34.07, down $3.66, or 9.7%, from their Tuesday close. The stock has been spared the downgrade ax so far, although several analysts lowered earnings estimates for 2005.

Shares of


(GOOG) - Get Report

were down 1.6% in sympathy.

In the quarter ended June 30, Yahoo! posted earnings of $755 million, or 51 cents a share, up from the year-ago $113 million, or 8 cents a share, a year earlier.

However, excluding a 38 cent-a-share gain on the sale of investments, the second-quarter earnings were 13 cents a share. Revenue rose 44% from a year ago to $875 million on a so-called net basis, excluding the money Yahoo! shares with its paid search partners.

Wall Street analysts had forecast earnings of 13 cents a share excluding the gain on revenue of $883 million.

Yahoo! makes money from targeted ads, such as ad banners, and from sponsored links that appear alongside its search results. But it doesn't break out revenue into the two categories. And when analysts probe for more insight, Yahoo! isn't very forthcoming. Or it usually isn't.

Perhaps the most telling moment in Tuesday's conference call came when Anthony Noto of Goldman Sachs did some reverse engineering of Yahoo!'s numbers to extrapolate a possible decline of search-related ad revenue in the quarter.

Noto pointed out that the revenue that Yahoo! shares with search partners went up a bit, which would imply a 10% increase from the previous quarter in nonsearch revenue, above the 7% growth in its total net revenue. In other words, Yahoo! saw faster revenue growth in branded advertising than it did in search -- a reversal from first-quarter trends but not unexpected as searches slow down during the summer.

"You've always been pretty good at math. You should have some confidence in your estimates there," CFO Sue Decker told Noto. "Our top 200 U.S. brand advertisers expanded their budgets more than our 43% overall average. And they're the lion's share of the total. You're in the ballpark on the target."

In that case, how much of the disappointment investors are feeling over Yahoo!'s revenue numbers is the result of optimistic analysts getting ahead of themselves, and how much was caused by a slowdown in search-related advertising that was stronger than many were expecting?

Either way, it doesn't bode well for Google's stock. Google, which is much more dependent than Yahoo! on search-related advertising, hit an all-time high of $310.35 Tuesday.

A bright spot in Yahoo!'s earnings report was that more people are willing to pay fees, rather than relying only on the vast amount of free content on the site. While the number of registered users in the second quarter rose 3% over the first quarter to 181 million, the number of fee-paying customers jumped 13% to more than 10 million -- likely on the back of Yahoo!'s beta online-music product.

"It wasn't long ago when everyone said I was crazy -- and perhaps I was -- for thinking that we could attract 10 million paying relationships," said CEO Terry Semel. "Now we're on our way to 15 million paid relationships."

In fact, buried in the gloom of the slowdown in search ads were signs that Yahoo! is not only attracting more users, it's cultivating deeper relationships with its longer-standing users. A stickier Yahoo! is good for two reasons: It makes users more willing to pay for services, and it makes advertisers more eager to buy ads on the site.

"The rapid advancements in technology are driving a new generation of user-driven applications and a deeper level of consumer engagement," Semel said. "This evolution will create business opportunities that directly align with Yahoo!'s strengths."

Yahoo! said revenue excluding traffic acquisition costs would be between $880 million and $930 million in the third quarter and between $3.6 billion and $3.7 billion for the full year. Three months ago, Yahoo! estimated full-year net revenue between $3.57 billion and $3.72 billion.

The company also forecast operating income before depreciation and amortization to come in between $350 million and $380 million in the third quarter and between $1.52 billion and $1.58 billion in the full year. Previously, Yahoo! had forecast the full-year figure to be between $1.5 billion and $1.58 billion.

Those estimates are essentially in line with its earlier guidance numbers, and perhaps just a tad more optimistic. Yahoo! did substantially move up its estimate for the money it would spend on capital expenditures this year. It now expects to spend between $380 million and $405 million, up from the old range of $355 million to $380 million.