SAN FRANCISCO – Shares of Yahoo Inc. (YHOO) plummeted to a new 52-week low Wednesday after an unexpected delay in a much-touted technology to boost the company's ad revenue overshadowed a solid quarter.
Shares of Yahoo fell $5.89, or 18 percent, to $26.35 in morning trading on the Nasdaq, below the low point of the stock's range of $28.60 to $43.66 over the past year.
Yahoo keeps raking in more money as advertisers continue to shift their spending to the Internet, but the Internet powerhouse keeps lagging behind online search leader Google Inc. (GOOG).
And now it looks like Sunnyvale, Calif.-based Yahoo won't be closing that gap as soon as management had promised, much to the dismay of Wall Street.
"I can sense the frustration of investors," said Piper Jaffray analyst Safa Rashtchy. "It's discouraging and disheartening, especially because Yahoo didn't really give a good reason for the delay."
If not for the backlash, Yahoo might have been in a better position to celebrate its second-quarter results.
The owner of the world's most trafficked Web site said after financial markets closed Tuesday that it earned $164.3 million, or 11 cents per share, during the three months ended in June. That matched the average estimate among 34 analysts surveyed by Thomson Financial.
The quarterly profit marked a 78 percent drop from the second quarter of 2005, when Yahoo earned $754.7 million, or 51 cents per share.
The sharp decline is deceiving because Yahoo realized a $552 million windfall in last year's quarter by selling its remaining stake in Google. New accounting rules also required Yahoo to deduct the cost of employee stock options from its profit, something it didn't have to do last year.
Revenue for the second quarter totaled $1.58 billion, a 26 percent improvement from $1.25 billion last year. After subtracting the commissions Yahoo paid to other Web sites in its advertising network, revenue stood at $1.12 billion, up 28 percent from last year.
The latest results quickly became an afterthought during an analyst conference call Tuesday, when Yahoo Chairman Terry Semel revealed that a much-anticipated change in the company's formula for displaying ad links will be delayed by two or three months.
Investors have been eagerly awaiting the new ad platform, hoping the improvements would enable Yahoo to do a better job displaying short ads for Yahoo's audiences to click. The clicks on those ads, which typically appear as text on the top and sides of Web pages, are critical because they trigger commissions for Yahoo and its partners.
Google's financial growth during the past two years has outstripped Yahoo's partly because it has developed a better formula for determining which ads to display alongside search results — an advantage that even Semel concedes.
"We are not monetizing as well and it is costing us a lot of money," Semel said Tuesday in an interview.
Yahoo now doesn't expect its new approach to be fully deployed until early next year. In May, Yahoo said it planned to start rolling out the changes in the third quarter and complete the process in the fourth quarter.
Semel said Yahoo didn't want to risk a hiccup as advertisers ramped up their spending for the holiday season.
"We feel terrific about (the new formula) and know the importance of it," Semel said. "There is nothing wrong or nothing we are upset about."
Investors, though, were clearly agitated. Yahoo's stock rose 40 cents before the report to close at $32.24 per share on the Nasdaq Stock Market. But then it plunged $4.44, or 13.8 percent, to $27.80 in extended trading, wiping out $6.5 billion in market value.
Yahoo's second-quarter performance also appeared to dampen hopes for Google, which is scheduled to release its results Thursday. After falling $4.84 to close at $403.05 in regular Nasdaq trading on Tuesday, Google's shares fell $4.07, or 1 percent, to $398.98 in early trading Wednesday.
Yahoo still boasts the Internet's largest audience with 402 million unique users. But it has been losing favor among investors as Google has widened its lead in the lucrative search market and News Corp.'s (NWS). youth-oriented MySpace.com has emerged as a hip place for the next generation of Web surfers to hang out. News Corp. is the parent company of FOX News, which operates FOXNews.com.
Through June, Google held a 44.7 percent share of the U.S. search engine market, up from 36.9 percent at the same time last year, according to comScore Media Metrix. Yahoo ranked second with a 28.5 percent share, down from 30.4 percent a year ago, comScore said.
Meanwhile, MySpace.com has been threatening to supplant Yahoo as the most viewed site on the Web.
Even before Tuesday's late slide, those worries had already helped slice off nearly a fifth of Yahoo's share price since the start of 2006.