Nobody's Buying Yahoo!'s Spin - TheStreet

Nobody's Buying Yahoo!'s Spin

Shares slide as investors question management's bullish disposition.
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There will be no more sacred cows at

Yahoo!

(YHOO)

as the company re-examines its strategy, according to CEO Jerry Yang.

But if the company's conference call late Tuesday is any indication, "spin" will continue to have a welcome home.

Yahoo! announced second-quarter results on Tuesday that came in toward the bottom end of Wall Street's expectations. The company had taken the occasion of the departure of CEO Terry Semel in June to hint that results would be weak, so that came as little surprise.

But Yahoo! also guided down for the rest of the year, causing its already battered stock to slide almost 5% in recent trading to $26.20, amid what was shaping up as a broad market selloff.

And while Yang wants his tenure at the top spot to be marked by a brutal honesty that finally sets Yahoo! right, the company continues to spin many crucial aspects of its situation.

This means that even its recently dimmed outlook may be too rosy.

Take the company's display ad business, one of the few areas where Yahoo! remains a market leader. Not only is this arena under pressure from huge competitors like

Google

(GOOG) - Get Report

and

Microsoft

(MSFT) - Get Report

, which have recently made big acquisitions to move in aggressively into the territory, it will likely also be threatened by the rise of popular new social-networking sites like Facebook.

To watch Vishesh Kumar's video take of this column, click here

.

Indeed, Goldman Sachs analyst Anthony Noto asked during the call whether much of the new ad inventory being created by these sites has the type of measurable, high-quality audience that could give Yahoo! a run for its high-end ad space. "As we go into 2008, how much do you see this as a new risk, potentially a pricing pressure on your current premium inventory or a potential mix shift away from your product to others if you do not lower prices?" Noto asked. Goldman Sachs makes a market in Yahoo! shares.

The new competition was an opportunity instead of a risk, Yahoo! President Sue Decker responded. Yahoo! would be able to sell the new space through ad exchanges like Right Media, which it recently acquired. In fact, the new competition "is one of the reasons that we feel, longer term, our positioning is really strong," Decker said.

That type of Orwellian reasoning may be, for investors, a little too reminiscent of former CEO Terry Semel, who was asked what he thought about Google's plans to muscle into Yahoo!'s display ad turf through the acquisition of DoubleClick. Semel tried to spin the development as a good thing, saying that Google's move validated the strategy of selling both search and display advertising that Yahoo! had been pursuing all along.

Yahoo! may also be overhyping its prospects when it comes to search advertising. The company's highly anticipated Panama ad-ranking system was supposed to finally kick in and help the company's bottom line starting in the second quarter. And the initial gains of between 15% to 20% year over year in the revenue per search the company reported are indeed impressive.

While that's a solid start, Yahoo! management had repeatedly said the new system would lead to continuing monetization gains over the year, as new data it gathered made the search algorithm even more powerful. But while talking up Panama on Tuesday, Decker also backed away from making any further bets on the system's impact to Yahoo!'s bottom line.

"We think that we're pleased we got a more responsive marketplace sooner than we expected," she said, implying that the strong gains may have future hopes of pickups already baked in. "So we think we got some of that growth in the second quarter and we don't think it's prudent to be assuming acceleration from here."

However, unlike the increasingly muscular money-generator that Yahoo! had been hoping for, Panama's impact may be much more limited, according to a recent study by RBC Capital Markets. The study notes that "a portion of Yahoo!'s initial Panama ramp has faded." And analyst Jordan Rohan notes that "Yahoo's Panama was modestly successful but only temporarily halted Google's gains in market share." RBC makes a market in Yahoo! shares.

The more things change at Yahoo!, the more they stay the same, it seems.