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Caris & Company analyst Tim Boyd sent a note to clients following Yahoo's (YHOO) earnings report -- key excerpts:

Yahoo! reported an In-Line-ish & Lower June quarter – net revenue of $1,123MM was $17MM shy of Street consensus, although $0.11 in GAAP EPS was In-Line with expectations. September quarter guidance of $1,170MM in net revenue and $475MM in EBITDA fell short of Street consensus. Yahoo! reiterated its existing full-year 2006 guidance ranges: $4,725MM in net revenue was $50MM lower than Street estimates, while $1,985MM in EBITDA was In-Line.

We continue to view YHOO shares as a 2007/2008 story. Until/unless the company is able to demonstrate tangible success vis-à-vis its search algorithm fix (i.e. grow its market share) it will be hard to make the case for re-acceleration in Marketing Services revenue growth, which in our view is the key driver of the stock. On the conference call last night, CEO Terry Semel revealed that Yahoo!’s schedule for rolling out the front end of its new advertising platform has now been pushed back an entire quarter to 4Q06. In our view, this announcement is a key incremental negative for the stock because it pushes any likely financial impact of Project Panama all the way out to 2H07. We believe that the announcement of this delay was the primary driver of the 14% after-market drop in YHOO shares.

Despite another quarter of strong Branded advertising results, we do not view the Branded medium as competitive enough on an ROI basis (relative to Paid Search) to drive acceleration in Marketing Services revenue on its own.
The results of a recent survey by the American Advertising Federation support this view:

ROI is, of course, one of the top determinants of where advertising dollars are spent, and based on this survey, Branded/Display/Graphical ads trail Paid Search by a sizeable margin. That could change someday, but for now Paid Search continues to be the runaway #1 beneficiary of the secular shift of ad dollars from offline to online and Google continues to expand its already dominant market share of this medium.

We remain concerned about the growth prospects for Yahoo!’s paid subscription services. Y/Y revenue growth in the company’s Fees segment continues to decelerate substantially despite robust growth in the number of fee-paying customers. The growth in users has simply not kept pace with the decline in ARPUs, which we expect will remain under pressure due to increased competition from a variety of smaller vendors.

We do not believe that Yahoo!’s results warrant an incrementally more cautious view on Google’s June quarter. Despite Yahoo!’s relatively weak search results in 2Q06, we encourage investors to buy weakness in GOOG shares leading up to Thursday’s earnings release. In our view, Yahoo!’s 2Q06 search revenues were negatively impacted by four company specific issues:

1. Slower Y/Y growth in revenue-per-search (RPS) as Yahoo! anniversaries coverage-increasing
measures taken in the middle of 2005.
2. Stable but not growing market share of queries.
3. The loss of MSN as its largest search affiliate partner.
4. The removal of several low-quality affiliate partners.

We would emphasize points #1 and #2 in particular. Yahoo!’s results actually verify our expectations for a strong June quarter in terms of query growth in the overall search market. Yahoo!’s problem was not volume, but monetization of that volume. We do not see any reason why there should be a similar slowdown in Google’s RPS, and since we continue to believe that Google took query share from Yahoo! and MSN during the quarter, we remain confident in our above-consensus revenue estimate for Google.

Source: Tim Boyd: Yahoo Stock is a 2007/2008 Story