- Aside from the promise of Project Panama, we believe Yahoo!s core business fundamentals are deteriorating. As such, we are reducing our estimates and reiterating our Neutral rating.

- Graphical Ad Weakness to Continue. Yahoos graphical ad business grew ~30% in 3Q (from ~39% in 2Q). Consistent with our thesis, we believe newly addressable page view inventory may lead to CPM pressure and in-line industry growth. Consequently, we are lowering our F07 growth assumption to 24% from 27%.

- RPS Declines May Suggest Poor Traffic Quality. 3Q gross search revenues grew ~15% due to RPS declines and the loss of MSN. Yahoo! guided for 4Q growth of only ~5% and suggested further RPS weakness. We are concerned by RPS declines as they may indicate that advertisers ROIs are deteriorating.

- Project Panama on Track. Yahoo! launched phase I of Panama yesterday and remains committed to on-schedule launch of Phase II. However, we believe financial upside is still 2+ quarters away.

- Intl TAC growth augurs well for Google. Googles greater exposure to the intl market, combined with our belief Yahoo!s US TAC weakness was company-specific means we remain bullish on Google going into its 3Q announcement Thursday.

- On an EV/EBITDA basis, Yahoo! trades at 11.4x our F07 estimate of $2.2B vs. its peers at 15.0x F07 estimates. Given our concerns about the graphical segment, we reiterate our Neutral rating.