Analysts Expect Rough Q4 For Yahoo

arrow downYahoo's hiring of Carol Bartz this month as the beleaguered Web portal's new chief executive won praise from Wall Street analysts following the company. But that move will not change the grim outlook for Yahoo's fourth-quarter earnings, slated for release Tuesday.

Analysts expect that Yahoo will hardly be immune to the advertising downturn plaguing Internet companies generally. The company's results will be dragged down by the deterioration of display advertising, which accounts for the biggest share of its revenue.

The consensus estimate for the fourth quarter is a profit of 13 cents a share on revenue of $1.37 billion after subtracting earnings paid to advertising partners, according to analysts surveyed by Thomson Reuters.

Analysts highlighted the negative impact of continued weakness in display advertising on Yahoo's quarterly results. Citi analyst Mark Mahaney projects the first yearly decline in display ad revenue at Yahoo leading to the first flat-to-down year ever in overall revenue for the company in 2008.

RBC Capital Markets analyst Ross Sandler points out that Yahoo is overexposed to troubled ad sectors such as financial services and autos, which make up an estimated 30% to 40% of its display revenue. "We have heard of delays and outright cuts in advertiser campaigns on the display side at Yahoo since mid-3Q," he wrote in a recent research note.

Worse, Sandler adds: "Preliminary indications on early January are worrisome, with display tracking down 20% to 25% year-over-year."

Things look better on the search side, where quarterly and annual growth is expected as Yahoo benefits from the shift of ad dollars to search as a more cost-effective and accountable option for online marketing.

With the appointment of Bartz, the door to a search partnership or outright sale of its search business to Microsoft has also been reopened. RBC's Sandler estimates that business to be worth about $10 billion, or $7 a share. Microsoft CEO Steve Ballmer has indicated his willingness to resume search-related talks with new management in place at Yahoo and Microsoft.

Analysts look favorably at a possible search deal with Microsoft as well as a potential merger with AOL to boost both display and search ad revenue. "We believe a strategic tie-up with AOL might be a very viable option for Yahoo, making it the leading display advertising company on the Net," wrote Citi's Mahaney in a Yahoo earnings preview.

But Wall Street doesn't expect Bartz to make any dramatic announcements about company strategy during Yahoo's conference call Tuesday. The former Autodesk chief executive has caused a stir with some of her initial public comments since being named Yahoo CEO Jan. 13.

She asked, for instance, that the company be given some "friggin' breathing room" and stated that Yahoo "frankly, could use a little management." Her no-nonsense, take-charge style is viewed as a welcome change from a perceived reluctance by co-founder and former CEO Jerry Yang to make tough decisions.

But analysts expect her to provide limited or no guidance on 2009, with the possible exception of the first quarter. "With a new CEO, we believe that it is likely that any movement on a strategic decision is likely to be postponed to give Bartz and her team more time to evaluate all the options," wrote Sandler.

The only hint Bartz has given of her plans to date is a comment she made in her first company-wide meeting at Yahoo, saying that her "gut" was telling her not to sell the search business to Microsoft. If she ends up opposing such a deal, analysts and investors may not be quite as enamored with her.

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