Yahoo Flat on Revenue -- Again

Ailing Portal Struggles Amid Change

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NEW YORK ( -- After several executive defections and reports of a possible buyout attempt by private equity groups working in concert with AOL, Yahoo appeared more vulnerable than ever today as it reported another essentially flat quarter.

Carol Bartz
Carol Bartz
Third-quarter revenue slipped 0.08% to $1.12 billion, excluding revenue paid out to partners, also known as traffic-acquisition costs, the company said. That means company revenue remains more than 15% below its level in 2008, when it collected $1.33 billion in revenue during the equivalent quarter.

Yahoo's display ad revenue increased 17% from the third quarter of last year, good news for the company as Google continues to gain traction in display ad sales and online ad spending recovers in general. But Yahoo's search ad revenue declined 7%, the company said.

Third-quarter net earnings increased 113% to $396 million, but that figure was buoyed by the company's sale of HotJobs. Gross revenue, meanwhile, rose only 2% to $1.6 billion. The company also lowered expectations for the fourth quarter, saying it will see revenue of $1.12 billion to $1.23 billion, excluding traffic-acquisition costs, which would mark a drop of 2% to 11% from the previous year.

Before the earnings announcement today, shares in Yahoo closed at $15.49, nearly 19% below its 52-week high.

Yahoo's lackluster stock performance has been in many ways a referendum on Ms. Bartz's now 20-month long tenure. A recent report from Dow Jones said Yahoo's board would not be seeking a replacement for Ms. Bartz in the immediate term, but analysts and investors will be looking for her to reinvigorate the company within the next few quarters. Short of that, her executive seat will most likely be up for grabs.

Possible takeover bid
Yahoo's flat performance and inconsistent message has also seemed to put it at risk for a possible takeover. Private equity groups Silver Lake Partners and Blackstone Group and rival AOL are looking to buy Yahoo, according to the Wall Street Journal.

When analysts asked about this possibility during the company's earnings call today, Ms. Bartz responded bluntly. "I can't comment on rumors, and as CEO, I shouldn't," she said.

The interested parties have been looking at ways to engineer what is known as a reverse merger, in which a complicated set of stock-buying arrangements would enable the group to take Yahoo private. That private entity could then buy AOL and install its CEO, Tim Armstrong, as head of the combined company. Such a deal would be largely contingent on a side arrangement with Chinese joint venture Alibaba. Yahoo has a 40% stake in Alibaba, which is valued at around $10 billion. CEO Jack Ma has expressed interest in buying back that stake, an offer Ms. Bartz has refused.

Roughly half of Yahoo's $21 billion market capitalization comes from its $10 billion stake in Alibaba. An offer from AOL and private equity allowing Mr. Ma to get back his shares would effectively lower the deal price.

"I have tremendous respect for Jack Ma and the Alibaba team," Ms. Bartz said on the call, "and we're committed to a good productive business relationship, but beyond that, I will not speculate."

Observers have argued that Yahoo has not defined itself for the web of the moment, suggesting that a standard portal business is increasingly anachronistic in the face of digital media's rapid evolution. More and more people have flocked to Facebook, for one thing, as their main entry point to the web.

And despite Yahoo's aggressive $100 million marketing strategy around its new search product, it has not gained ground against Google, which has a 65.1% share of the search industry to Yahoo's 13.1%, according to Nielsen. Even Bing has a higher share than Yahoo with 13.9%. Though Yahoo has integrated Bing's software engine into its backend, Microsoft maintains Bing as a standalone brand.

Ms. Bartz has been criticized for her brusque manner and her ambiguously stated vision. In what sounded like a response to that criticism, Ms. Bartz reiterated what she felt was the company's vision at the top of the earnings call. "I want to reiterate our vision," she said. "Yahoo is an innovative technology company that operates the largest digital media, content and communications businesses in the world."

Earlier this month, the company suffered several executive defections when exec VP Hilary Schneider, senior VP David Ko and media VP Jimmy Pitaro all announced they would be leaving the company, though separately from each other. Mr. Pitaro is moving to Walt Disney, where he will be co-president of its digital arm. Mr. Ko is headed to online gaming network Zynga to manage its mobile efforts.

Ms. Schneider, meanwhile, has not announced her next career move, but the company said she will remain in place until her replacement has been found. People familiar with the matter say part of the tension stemmed from product VP Blake Irving's ascendancy within the company. He has taken on more responsibilities related to the company's growth, and his mandate to spearhead new products has taken resources away from other departments, insiders say.

Ms. Schneider has for the past few months been in charge of the sales team, which was recently reorganized after the company could not find a sales head to replace Joanne Bradford, who left the company in March of this year to join Demand Media.

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