New CEO, same results for Yahoo

Q2 profit, net income down; shares tumble on weak profit outlook

Struggling to make a dent in rival Google Inc.'s dominance over online search, Yahoo Inc. reported a quarterly decline in profit Tuesday but managed to match already lowered expectations.

Yahoo, which recently swapped CEO Terry Semel with co-founder Jerry Yang after several quarters of subpar performance, said net income for the second quarter was $160.6 million, down from $164.3 million a year ago.

Revenue rose 8% to $1.7 billion, while revenue minus traffic acquisition costs, or the commission Yahoo pays to online partners, rose 11% to $1.2 billion.

As has been a trend lately, Yahoo dulled its profit outlook, prompting investors to sell shares in after-hours trading, sending the stock down as much as 4%. During the regular session, Yahoo was up 3.1% to $27.53.

Yahoo said it now expects revenue without traffic acquisition costs for the full year to be $4.9 billion-$5.2 billion. In April, the full-year forecast was for $5 billion-$5.5 billion.

During a Tuesday conference call with analysts, Susan Decker, who was promoted to president when Semel was replaced by Yang, acknowledged Yahoo's past failings.

She said the company had been slow to recognize emerging trends in online advertising and that Yahoo's management structure was overly complex, opening the door for more nimble competitors.

But she said that recent changes -- like an integrated ad sales force -- are "more significant than commonly understood," and she said the global rollout of the search initiative known as Panama is "progressing extremely well."

Analysts, however, seem a tough sell. For example, RBC Capital Markets analyst Jordan Rohan said Tuesday that the results from his firm's latest online ad study were "definitely not good for Yahoo."

Yahoo commanded an 18.3% share of paid-search marketing spending in June, up from May's 17.8%, Rohan said, but June's percentage is still the third lowest at Yahoo since January 2006.

"Google continues to dominate spending with over 75% market share," he wrote. "Panama stabilized Yahoo's market share slide, but has not reversed it."

Rohan said that even with Panama, advertisers see a better return on investment with Google, which boasts higher click-through rates at lower prices. "Yahoo's Panama was modestly successful but only temporarily halted Google's gains in marketshare," he said.

Goldman Sachs analyst Anthony Noto this month called Google, along with eBay Inc., his only large-cap "buy"-rated stocks among Internet large-cap companies.

"Success on Yahoo's Panama platform (which has yet to significantly materialize, in our view) or more significant growth from smaller engines including MSN or Ask.com could ultimately expand the overall search market," Noto wrote in a research note. "The search market stands to benefit from new advertisers coming online that had not previously utilized the search medium."

Unlike the days of Semel, Yahoo's management team spent little time Tuesday talking about Yahoo's efforts to increase the number of Internet users who pay a premium for Yahoo services.

Premium offerings had been a priority for Semel since he joined as chairman and CEO shortly after the Internet bubble burst at the beginning of the decade, when suddenly marketers doubted the effectiveness of online advertising. The industry, however, has come roaring back, after a dip in 2002 to $6 billion spent on Internet advertising in the U.S. Experts are predicting about $26 billion to be spent in 2010.

Blake Jorgensen, who replaced Decker as CFO, said Yahoo spent $418 million during the second quarter, repurchasing stock for an average price of less than $29 per share, bringing its total to $1 billion in buybacks so far this year.

He said that Yahoo's overseas investments in companies like Alibaba and others should be valued at about $8 billion, or $6 per Yahoo share.

"I intend to spend the next 100 days or so focused on mapping out a strategic plan," Yang told analysts during the conference call. "There are no sacred cows."
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