Yahoo Shares Down After Ad Report

NEW YORK — Just hours before the company is slated to report second-quarter results, Yahoo Inc. shares fell following negative comments about the online advertising market from Merrill Lynch & Co. analyst Henry Blodget.

In a research note Wednesday, Mr. Blodget said the Santa Clara, Calif., Web portal’s revenue in the second quarter ended June 30 would probably be about $175 million, below his formal estimate of $185 million. Yahoo predicted in April revenue would be between $165 million and $185 million.

Analysts surveyed by Thomson Financial/First Call have a mean estimate for Yahoo to post break-even results, excluding special items, on revenue of $175.1 million. A year earlier, Yahoo earned 12 cents a share, excluding items, on revenue of $270.1 million.

Mr. Blodget attributed his reduced view to recent signs of a weak second quarter from other companies that derive revenue from online advertising. On Tuesday, DoubleClick Inc. (DCLK) reported an operating loss that was narrower than expected, but its revenue fell 27% from the first quarter and 50% from a year earlier.

And last week, Inc. (SPLN) warned of lower-than-expected second-quarter results, citing soft advertising sales.

The reports from DoubleClick and SportsLine “suggest the online advertising market was even weaker than expected” in the second quarter, Mr. Blodget said.

In midday trading on the Nasdaq Stock Market, shares of Yahoo (YHOO) were down $1.66, or 9.3%, to $16.17. Earlier, the shares fell as low as $15.31.

Mr. Blodget now believes the overall online ad market in the second quarter fell 15% to 20% from first-quarter levels, a steeper drop than his previous forecast of an 8% decline.

In addition to trimming his estimate of Yahoo’s revenue, Mr. Blodget suggested his view of AOL Time Warner Inc’s (AOL) online advertising revenue was “likely a bit high.” But he remains comfortable with his overall estimates for AOL, he said.

Other companies that could be affected by advertising weakness include Inc. (HOMS) and Inc. (GOTO), Mr. Blodget said.

The online ad market probably won’t hit bottom until the third quarter, later than Mr. Blodget’s previous predictions of the first or second quarters of this year, he said.

Mr. Blodget isn’t alone in being cautious about Yahoo. W.R. Hambrecht analyst Derek Brown said Wednesday the company could slightly exceed his estimates of a loss of one cent a share on revenue of $173.4 million. But any upside won’t by enough to “generate investor enthusiasm,” he said, adding that the company’s fundamentals are weak.

Yahoo still depends too heavily on online advertising, and its efforts to supplement ad sales with things like premium services haven’t yet gained momentum, Mr. Brown said.

ABN Amro analyst Arthur Newman said the online ad market remains weak, and he expects Yahoo management to remain cautious about the market on a conference call scheduled for 5 p.m. EDT Wednesday.

Mr. Newman said Yahoo’s new Chief Executive Terry Semel, “needs to clearly articulate his strategy and action plan for moving Yahoo ahead. We believe Yahoo will need to overcome major challenges if it is to become more than a poorly diversified mid-tier media company.”

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