Yahoo Misses Q2 Estimates Amid Weaker Ad Sales

Pete Barlas Tue Jul 22, 7:05 PM ET

Yahoo missed second-quarter sales and earnings forecasts Tuesday and narrowed its full-year outlook, but that didn't faze investors who saw hope in U.S. ad sales despite a weakening economy.

Shares rose 2% in after-hours trading after falling 1.25% during regular trading Tuesday, despite second-quarter earnings results that fell well short of the average estimate of analysts polled by Thomson Reuters.

For the quarter ended June 30, Yahoo's earnings fell 18% from the year-ago quarter to 9 cents a share, 18% below views.

Sales rose 8% to $1.35 billion, excluding traffic acquisition costs, or the fees it pays partner Web sites to carry its ads.

That's nearly 2% short of views.

Yahoo also narrowed its annual outlook to $7.35 billion to $7.85 billion vs. its prior prediction of $7.2 billion to $8 billion in March.

Investors are looking at the fact that Yahoo's U.S. revenue jumped 13% over a year ago while international revenue dropped 8% vs. a year ago, says David Garrity, analyst for Dinosaur Securities.

"It was not the U.S. market that accounted for the shortfall, which augurs better things for the second half of 2008," he said. "They put up a double-digit gain, and people are buying it up."

Yahoo CEO Jerry Yang said the economic downturn is hurting online display advertising, his company's main moneymaker.

"Like many companies in our industry, we were affected by the weakness in the overall economy," he said. "In some categories such as CPG (consumer packaged goods) and finance, we saw demand for branded advertising soften and we saw a shift away from branded campaigns toward performance (search) marketing ."

In last few months, the troubled Internet icon has come under fire by shareholders for rejecting two takeover bid from Microsoft, including one for $33 per share.

Yahoo's refusal sparked a proxy fight by billionaire investor Carl Icahn. Yahoo on Monday ended a two-month battle with Icahn by granting him three seats on an expanded Yahoo board less than two weeks before the company's Aug 1. shareholder meeting.

While Yahoo's management has arguably made some missteps, the second-quarter results follow lackluster numbers posted by other Internet stalwarts, including Microsoft, online ad network ValueClick, Web auctioneer eBay and Google, Yahoo's main rival.

"You have to look at what is going on with the overall economy," Garrity said. "If you go back and look at the results that came out last week for Google and Microsoft, we are in a situation where it looks like the economy has caught up with the Internet."

Yahoo gets most of its revenue from ads, including online display ads and text-based ads that show up near search results.

Ads comprise the bulk of Yahoo's marketing service revenue, which increased 7% to $1.587 billion vs. $1.486 billion a year ago.

Yahoo has been scrambling to compete with Google for a bigger share of paid search ads, the fastest growing segment of the multibillion dollar online ad market.

So far, Yahoo has failed to catch Google.

A proposed partnership with Google that would place Google search ads on Yahoo properties in the U.S. is under review by the Justice Department.

More online advertisers are turning to search ads because they pay only if a consumer clicks the ad.

Yahoo is getting hurt from advertisers that are reducing their spending on display ads because of the sluggish economy, says Youssef Squali, analyst for Jefferies & Co.

"As the market slows down, it's becoming very hard for them to right the ship in the short term," he said.