San Francisco — Struggling Web pioneer battered by a souring economy taking its toll on the online advertising business and Microsoft Corp.’s failed courtship; Yahoo Inc. on Tuesday reported that its net income of $131 million, or 9 cents a share, dropped by nearly 19 percent in the second quarter from a year ago as revenue grew at a sluggish 6 percent rate, while executives say a turnaround is well under way.
The Sunnyvale-based company said net income for the quarter ending June 30 excluding payments made to Yahoo’s affiliate sites to acquire traffic was up 8 percent, reaching $1.35 billion, but short of the Wall Street’s consensus of $1.37 billion, according to analysts polled by Thomson Reuters.
“Analysts, on average, expected earnings of 10 cents a share on $1.38 billion in net revenue.”
However, revenues for the recently finished second-quarter increased an anemic 6 percent to $1.8 billion from $1.7 billion for the equivalent period in 2007.
Yahoo! Inc., the Internet Company that added activist investor Carl Icahn to its board yesterday, posted an 18 percent drop in second-quarter profit after spending more on developing new projects.
“Despite the weak economy and distraction form Microsoft we did well,” co-founder and chief executive Jerry Yang in a conference call with analysts and media.
“It should be obvious that this has been a challenging time for our employees, yet despite the distractions the dedicated Yahoos have simply done a great job.”
In part, Yahoo’s earnings reflect the creeping impact that the souring economy has had on the overall online ad market, seen most recently in Google’s disappointing second quarter.
Shares of the Internet Company, which just settled a proxy battle with activist investor Carl Icahn, rose 2.7 percent to $21.99 in extended trade following the quarterly report.
“Investors braced for the worst,” said Jeffrey Lindsay, analyst at Sanford Bernstein. “These results are poor, but comparatively to what people were expecting, they are not so bad.”
Chief Financial Officer Blake Jorgensen said Yahoo was not changing its financial view for 2008, even though a difficult economic environment is weighing on online advertising.
“We are pretty pleased (with results), relative to both the distractions and the economy,” he said in an interview.
Yahoo executives made no secret that the quarter included unusual headaches, particularly the back-and-forth with Microsoft. Chief Executive Jerry Yang referred to the battle as “extraordinary,” but said he was committed to staying as CEO. President Sue Decker called the takeover fight a “swirl”.
“Yahoo is executing against its strategy, and we believe is well positioned for long-term growth and maximizing stockholder value,” said Yang. “Yahoo saw benefits in the second quarter from a number of the strategic initiatives that we have been delivering against, including the roll out of innovations in search and the announcement of a number of important partnerships. We are witnessing validation that we have the right strategy as we continue to make transformational investments that position us to take advantage of pivotal trends driving growth on the Internet.”
Yahoo executives repetitively spoke of the challenging economy in a conference call with analysts and listed financial, consumer-packaged goods and travel as among the worst-performing advertising sectors.
Echoing comments from other Internet companies, they said that advertisers are shifting their spending from display ads, the equivalent of online billboards — an area of particular focus for Yahoo. Search engine ads are doing better, they said, largely because advertisers can more easily track their performance.
Marianne Wolk, an analyst with Susquehanna Financial Group, said that Yahoo’s results were largely in line with the company’s results for the past few quarters. Turning around the business is still a high priority for the company, she said, after losing substantial ground to rival Google Inc. over the past few years. Google reported last week that its second-quarter revenue increased 39 percent.
“It was a reasonable performance against some very difficult challenges,” Wolk said.
Yahoo spent 22 million dollars defending an unsolicited take-over bid by Microsoft, which offered to buy Yahoo for 44.6 billion dollars in stock and cash on January 31.
Microsoft withdrew its offer on May 3, saying Yahoo refused to budge despite a bid sweetened to nearly 50 billion dollars.
Yahoo later revived talks with Microsoft, with Yahoo rejecting an offer to acquire only its search business and Microsoft saying it is no longer interested in buying all of Yahoo.
Analysts think Yahoo benefited from its encouraging financial forecast and a truce struck a day earlier with Icahn, ending his fight to oust the Internet pioneer’s board.
By settling a battle for control of the company with Icahn, Yahoo’s Yang said he has ended a major distraction. The proxy contest, along with the Microsoft pursuit, cost $22 million during the second quarter for advisers and legal fees.
Yahoo said it will give the billionaire and two of his allies’ seats on its board of directors in exchange for Icahn withdrawing a slate of nominees he was backing to replace the incumbents.
Yang also pointed to an advertising deal reached with Google, which is expected to increase Yahoo’s revenue $800 million annually, as one of many potentially important steps in reviving the company. But Yahoo executives said they are still awaiting regulatory approval before consummating a subsequent alliance with Google to pump money from ads posted alongside search results at Yahoo.
Sue Decker, Yahoo’s president, highly praised Yahoo’s second-quarter performance in an interview, saying that the company’s breadth in advertising insulates it somewhat from weakness in any one area. With all the turmoil during the second quarter, she said that it “could have been a perfect storm, but we posted gains” and added that the company has redoubled its effort to ramp up business.
Despite the distractions of Icahn and Microsoft, Yang said his company intended to keep looking at possible transactions.
“We have looked at just about every alternative you could imagine as far as looking at how do we best position the company to go forward either through transactions and/or financial options,” Yang said on a conference call.
Decker said that investors and analysts alike were focusing on two questions: does the company offer value to advertisers and marketers, and has the company demonstrated success on search? “We believe the answer to both questions is yes, and the progress this quarter reinforces both views,” Decker said.
As to the first question, Decker pointed to GLUE pages in Yahoo India, where search results can be organized and maximized across several pages to boost traffic throughout the rest of the Yahoo network. As for search, query growth is up 11 percent from last year, she said, indicative that the company’s investments in search are paying off.
With Icahn and his allies, who will join Yahoo’s board after its annual meeting August 1, Yang may face more internal pressure to reignite the company’s growth or sell to Microsoft.
The challenge for Yahoo will be to prop up its stock to near the level of the Microsoft’s $47.5 billion takeover offer, or $33 per share. By letting the negotiations collapse, Yahoo incited the anger of many shareholders, who would have been happy to get as much or slightly more.
However, rather than discussing any deal with Microsoft, Decker talked up her company’s own prospects in search, noting that it had recently posted two successive months of gain in market share, according to figures from comScore.
Decker said initiatives such as SearchMonkey, which will allow developers to annotate search results, and the recently launched BOSS (Build your Own Search Service) position Yahoo to gain back market share in what she described as a still-youthful market.
“Innovation in search still has a long way to go,” she said.
Release of the earnings figures apparently buoyed Yahoo stock, which had sunk more than a percent during trading in New York through the day.
Shares of Yahoo were up 59 cents in after-hours trading Tuesday to $21.99, or 2.8 percent. In regular trading, the stock closed down 27 cents at $21.40, or 1.3 percent.