Yahoo Profit Up 51%; Sales Disappoint

WASHINGTON (MarketWatch) –  July 21, 2010

Yahoo Inc. reported a sharp gain in second-quarter profit, thanks to improving margins, but the Internet giant also delivered search-revenue and net-sales figures that fell short of Wall Street estimates.

Yahoo Inc. reported a sharp gain in second-quarter profit, thanks to improving margins, but the Internet giant also delivered search-revenue and net-sales figures that fell short of Wall Street estimates.

As a result, Yahoo’s stock  (YHOO 13.94, -1.27, -8.32%) fell sharply Wednesday in premarket trades. Shares were down nearly 6% to $14.36.

After U.S. markets closed Tuesday, Yahoo reported that net income rose to $213.3 million, or 15 cents a share, from $141.4 million, or 10 cents a share, in the same period a year earlier. Net revenue for the quarter ended in June was $1.13 billion, the company said.

Analysts polled by FactSet Research had expected Yahoo to post earnings for the second quarter of 14 cents a share on $1.16 billion in net revenue.

We knew revenue was going to be a challenge this quarter,” said BGC Partners analyst Colin Gillis. “Revenue is always a challenge at Yahoo.”

Wall Street had anticipated an upbeat quarter from Sunnyvale, Calif.-based Yahoo, thanks to what has been a broad, gradual recovery in online advertising, and the company’s renewed focus on costs.

But while Yahoo said it saw a 19% gain in display advertising revenue and increased use of its search engine in the quarter, it also saw search advertising revenue decline 8% compared with the same period last year.

“We didn’t monetize searches as much as we expected,” Yahoo Chief Executive Carol Bartz said during a conference call with analysts.

Yahoo has undertaken a broad turnaround effort under Bartz, who has emphasized slimming down and developing a stronger focus on the company’s display-ad business. As part of that effort, Yahoo has a partnership in place with Microsoft Corp. (MSFT 25.28, -0.21, -0.81%) that should have Microsoft taking control of the inner workings of its search service by the end of this year.

Yahoo said Tuesday that its second-quarter results include $86 million in operating-cost reimbursements from Microsoft as part of the deal.

Yahoo also said its second-quarter operating margin rose sharply to 11% from 4.8% in the same period last year.

Yahoo Chief Financial Officer Tim Morse reiterated during the conference call that the company has set a goal of boosting its operating margin well above 20% in the coming years.

‘We knew revenue was going to be a challenge. … Revenue is always a challenge at Yahoo.’

For its current quarter, Yahoo has forecast between $1.09 billion and $1.19 billion in net revenue. Analysts have been looking for third-quarter net revenue of $1.17 billion, according to FactSet Research.

Yahoo has managed to stabilize its share of the U.S. search market in recent months, though it remains a distant second to Google Inc.  (GOOG 482.81, +1.22, +0.25%) and has lost some ground to partner Microsoft.

While Bartz said demand for display advertising seemed to suddenly dry up in early June, it has since recovered. “The first three weeks in July indicate that we’re back to normal,” Bartz said.