Updated from 1:10 p.m. EDT
just got a good look at the hazards of providing accurate guidance to Wall Street.
Just one quarter after the Sunnyvale, Calif., Net media giant
ignited a wild rally by
outshining the most bullish forecasts, investors this week were rubbing their hands together in anticipation of a repeat performance.
The problem, it seems, is that Yahoo! responded to its first-quarter surprise by supplying forecasts it deemed more realistic. Thus, when the company
posted results late Wednesday that were strong by any normal yardstick -- revenue up 90%, earnings double the year-ago -- investors pummeled Yahoo! for snubbing their guidance-beating ritual.
Wall Street steadily regained its wits throughout Thursday's session, as Yahoo! shares retook some of the ground they lost in a postclose Wednesday drubbing. After dropping as much as 11% Thursday morning, Yahoo! shares closed lower by $2.52, to $30.08, a decline of 7.7%. Following a huge run-up in recent months, Yahoo!'s shares hit a 52-week high of $36.51 last week.
"We had a record quarter," Yahoo! CFO Sue Decker told
Wednesday evening. "We were really pleased with the results."
The significant growth in advertising in the first quarter -- sponsored search in particular -- "took everybody by surprise," she said. "We incorporated that very strong growth and the much-higher base base into the outlook for the rest of the year and gave a very realistic outlook."
A little too realistic, apparently.
It did no good that Yahoo!, reporting revenue of $609 million, came in at the high end of its guidance range of $580 million to $615 million. (Those shorthand revenue numbers exclude traffic acquisition costs for the company's Overture Services paid-search unit.)
It also did no good that the marketing services business -- which now comprises more than three-quarters of Yahoo!'s net revenue -- grew 45% year-over-year on an organic basis, compared with 47%-48% in the first quarter. Sure, the second-quarter number is lower than the first, but it appears to be ahead of industrywide online advertising growth. That implies, according to Yahoo! CEO Terry Semel, that Yahoo! is taking share.
Nor, given Wall Street's high expectations, did it matter that overall revenue, excluding TAC, was up 42% for the quarter.
Instead, investors focused on relative weakness at paid search, which the company indicated it was affected by seasonally slower growth in the number of searches conducted and sequentially "flattish" per-click payments.
"Yahoo!'s track record of outperformance and investors' heightened expectations demanded meaningful upside on all fronts, not an in line quarter marked by weaker-than-expected Paid Search revenue and a minor boost to guidance," wrote Derek Brown of Pacific Growth Equities in a Thursday report. "As a result, these results -- despite being quite good by most measures -- are almost sure to be viewed as disappointing."
The pullback in Yahoo! shares Thursday rekindled the debate over whether the company's shares are still too richly priced. Brown, who has an overweight rating on the company, wrote, "We encourage investors to use any price weakness created by this news as an opportunity to establish or add-to positions in Yahoo! -- the premiere Internet franchise, in our view."
But Merrill Lynch's Jessica Reif Cohen, who has a neutral rating on the company, wrote Thursday that her analysis supported a price in the upper $20s. (Merrill has done noninvestment banking services for Yahoo!.)
Mark Mahaney of American Technology Research lowered his price target on the buy-rated Yahoo! from $34 to $32, adding that he expects the company's shares to trade in the mid-to-high $20s range through the end of the summer. "But in this range, we are buyers of YHOO shares," he wrote.
There were precious few buyers of Yahoo! shares in Wednesday's postclose session, as the company's failure to beat by a buck rekindled talk that Internet rivals such as
are moving in on Yahoo!'s turf. The slowdown talk continued to hammer Yahoo!'s search-engine peers Thursday, as
slipped 4% and
But if investors are worrying about the effect of a post-IPO Google on the search business, Decker indicated
once again that she isn't. "We think that search is an incredibly dynamic and fast-growing sector," she said. "And we think it can accommodate several major competitors."
While investors have been studying Google's newly published financials, Decker indicated that those numbers were old news to Yahoo!. As has already been disclosed, Yahoo! holds a stake in Google. And that partial ownership, said Decker, has its privileges. "Contractually, we've received their financials every quarter for the last four years," she said. "So there wasn't a lot incrementally we learned from the filing."