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Fool on Call: Yahoo! Unleashes Project Panama

Motley Fool Stock Advisor selection Yahoo! (Nasdaq: YHOO  ) has been struggling recently. Google (Nasdaq: GOOG  ) is cleaning Yahoo!'s clock right now because it has been more innovative in its design of useful technologies and more aggressive in bringing these technologies to the customer. In the latest round of sparring between the two search-engine heavyweights, Yahoo! once again looked sluggish and outgunned, as my Foolish colleague Rick Aristotle Munarriz pointed out.

However, Rick also left room for optimism, highlighting a few areas where Yahoo! appears to be doing things right. Utilizing the company's fourth-quarter earnings conference call, we will explore in much greater detail what is perhaps Yahoo!'s most important development -- Project Panama.

Operation Project Panama
As we look ahead toward the next several quarters, perhaps none of Yahoo!'s newest projects is as important to fiscal 2007 and beyond than its new advertising program called Project Panama.

In our last look at Project Panama, I compared Google's Internet ad growth to the lethal offensive attack of the Indianapolis Colts led by Peyton Manning. I wondered how one might counter such an attack. Only one answer came to mind, a Brian Urlacher-led Chicago Bears defense. Oddly enough, the two will be facing off in the Super Bowl in just over a week from now.

Yahoo! may have finally found an answer for Google's dominance of the advertising-search market. If so, fiscal 2007 may be the early beginnings of the comeback.

At the heart of its plan to recapture lost ground against Google, Yahoo! is turning to Project Panama in hopes of significantly improving its search monetization. Over the past several months, Yahoo! has sent out invitations to U.S. advertisers, encouraging them to get onboard with the new search-marketing system.

Fast migration
It appears advertisers are listening. During the call, CEO Terry Semel affirmed, "I'm happy to report that we have successfully transitioned the large majority of our [advertising] revenue" to the new system. He adds, "We will continue to send invitations to U.S. advertisers to upgrade to the new system throughout the remainder of the first quarter, and anticipate that all U.S. advertisers will have transitioned by the end of this quarter."

The migration process happened much faster than anticipated, and Semel was happy to report that the new ranking model employed by Project Panama will officially kick off ahead of schedule; the launch date is set for Feb. 5.

What it means
Semel went on to explain what the new ranking model means. Beginning on Feb. 5, all U.S.-based Yahoo! search marketing ads will be ranked by quality and key-word bid price. For instance, advertisements that have a higher quality ranking will be rewarded with "better placement on the results page."

The net effect of the new program is that it should "deliver more relevant text ads" to web surfers, and subsequently, "create greater volume of high quality leads" for advertisers.

Going international
While the U.S. market is the first to get the new program, plans are already under way to introduce the system to key international markets. In the second quarter, Japan will be the first international market to be included into the new framework, and from there it will be introduced to others on a "market-by-market basis."

As previously forecasted, management is expecting the new system to have a positive influence on revenues in the second quarter. In the question-and-answer portion of the call, more clarity was given; management indicated that it expects improvements to its revenue-per-search in the latter part of the second quarter. Further, Yahoo! anticipates the revenue impact to "gain momentum throughout 2007 and beyond."

The revenue impact will be significant. During the Q&A, it was pointed out that revenue growth will start out at about 8% at the beginning of the year, but by year-end average out at about 14%. That means Project Panama should result in very meaningful double-digit revenue growth particularly in the back half of the year.

Quality partners and innovative thinking
The whole of Project Panama is worthless, however, without quality partners participating. A key partner is eBay (Nasdaq: EBAY  ) . Semel indicated that Yahoo! has already "begun selling both graphical advertising and sponsored search within eBay."

Yahoo! also made strong inroads in the local advertising market by expanding its partnership of local newspapers to 225, up from 150. One of the key relationships that Yahoo! has with local newspapers is in job search. The combination of Yahoo!'s Hot Jobs with local job listings significantly expands the opportunities for searchers and presents unique marketing possibilities.

Other key partners added over the past quarter include News Corp.'s (NYSE: NWS  ) Fox News and Disney's (NYSE: DIS  ) ABC News, which will enhance its video-based advertising initiatives. But perhaps the advertising opportunity that stood out most for me during Semel's remarks was with Pepsi (NYSE: PEP  ) .

Pepsi's Doritos is sponsoring a program that allows Web surfers to submit their own commercial for the brand. The winning commercial, to be selected by Doritos, will then run in the upcoming Super Bowl. This new advertising initiative is particularly exciting, because it encourages strong user participation and creates meaningful branding opportunities for advertisers, and, finally, Yahoo! becomes the platform by which it is all made possible.

An exciting year ahead
2007 should prove to be an exciting year for Yahoo!. If Project Panama produces as it is expected to, it may also be an exciting time for shareholders.

As the company was getting blasted by Google's search-marketing program, Yahoo!'s stock hit lows this past October not seen since 2004. But the unveiling of Project Panama at the same time appears to have marked the beginning of a small rebound in the stock. When Project Panama becomes fully deployed throughout the United States in the first quarter and then in international markets in subsequent quarters, this small rebound may prove to be the early stages of a prolonged turnaround.

Are the days of Yahoo! being out-Googled over? I'm not willing to go that far, yet. But Project Panama may mark the end of the company being dubbed a bunch of Yahoo!s.

Recent related Foolishness:

Yahoo!, eBay, and Disney are all active recommendations in the Motley Fool Stock Advisor newsletter service. To find out all the reasons why, take a free 30-day trial service today. Just click here to sign up today.

Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a user-friendly disclosure policy of its own.

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