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Wednesday, September 20, 2006

Yahoo! Warns - 85 Days After We Warned You!

By William Trent, CFA of Stock Market Beat

Speaking to investors gathered in New York for a conference sponsored by Goldman Sachs, (Yahoo! CFO Sue) Decker said weak sales of online automotive and financial ads during the last three to four weeks will cause the Internet giant’s revenue to “come in at the bottom half” of the $1.11 billion to $1.22 billion range Yahoo forecast in July. (MarketWatch)

We started getting a whiff of this possibility on June 26 when Valassis warned. As we said then:
The company attributed this shortfall to continued softness in Free-standing Insert and Neighborhood Targeted page volumes. Both segments are also experiencing pricing pressure.
Targeted ads and inserts are both areas that could be suffering at the hands of on-line advertising outlets, as the new media version may simply be more effective at reaching targeted consumers than the old.

Proponents of this theory could point to the pricing pressure and infer that some of it may be due to the new options available to advertisers. This secular story is well known, and the ongoing shift of marketing dollars from newspapers and television into the Internet is a major contributor to Google’s share price.

Of course, the other side of the argument is that ad-driven business models are all highly cyclical and consumer dependent. With the consumer up to its eyeballs in debt and the housing market slowing, consumer cyclicals may be due for a slowdown. In this case, which is supported by the softness in volume, all ad-driven business models could suffer - Google included.

We brought up the potential link again on July 13 when Journal Register missed earnings.
Profits for newspaper publisher Journal Register Co., were down for the quarter ended June 25, largely because of weak advertising revenues in Michigan and Ohio. The company announced profits Thursday of $9.8 million or 25 cents per share, including a one-time charge of $2.5 million.

The fact that the worst of the slowdown is in Big Three Auto territory is telling but not surprising.Now it’s Yahoo’s turn. Once again, the culprit is auto ads. This is officially not old media losing market share, but a full-fledged consumer slowdown-driven decline in advertising. The thing is, Yahoo! and Google have higher multiples that will come down along with the earnings estimates.

The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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