Yahoo Posts Flat Results for Second Quarter

Search Revenue Down, Display Revenue Up; Web Giant Reports Slight Rise in Net Income

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NEW YORK (AdAge.com) -- Despite having more aggressively mounted an original-content strategy this year, Yahoo posted middling revenue for the second quarter, booking $1.13 billion, representing a 0.7% drop from the same period last year. More tellingly, that figure is down 16% from 2008, suggesting the portal giant hasn't fully recovered from the recession's effects on digital advertising.

The Sunnyvale, Calif.-based company's lackluster performance has been reflected in its stock price, which has dropped 11% since January and has stagnated in the mid-teens ever since CEO Carol Bartz joined the company. Shares were down more than 6% in aftermarket trading following the company's revenue announcement.

Yahoo took in $216 million in profit on $1.60 billion in gross revenue, a 2% increase over last year.

"We're pleased that we continued to deliver strong operating income and margin expansion," Ms. Bartz said in a statement. "Our search fundamentals are improving, and we posted another quarter of healthy display-advertising growth."

Interestingly, this is Yahoo's first quarter without a head sales executive in place. Senior VP Joanne Bradford left just weeks before the start of the last quarter to take the top sales position at Demand Media. A guessing game over who may get Ms. Bradford's vacant post has ensued, and a fairly wide range of names have been bandied about. Initially, insiders say Associated Content CEO Patrick Keane was the most likely executive to get the job after Yahoo acquired Associated in May, but Mr. Keane has since denied any interest. Executive VP Hillary Schneider has been acting in Ms. Bradford's stead since her departure almost four months ago.

Yahoo has been looking internally as well, and the two people most likely to fill the job, according to those with knowledge of the matter, would be either Mitch Spolan or Seth Dallaire, both of whom are VPs within the sales ranks at Yahoo. Mr. Spolan is a 12-year veteran of the company, while Mr. Dallaire came to the company in October from Microsoft where he was a senior director of ad sales. He was brought in under Ms. Bradford's reign, as the two once worked together at Microsoft. There had been chatter that he may jump to Demand as well, but given that Ms. Bradford already nicked Yahoo VP of Brand Packaging Erika Nardini to do the same at Demand, Mr. Dallaire may be hands-off.

"Yahoo is a great company, and they have a great group of possible internal candidates for the job," Ms. Bradford told Ad Age last month about her open post.

The departures of Ms. Bradford and Ms. Nardini may account for a certain flattening of overall performance. Yahoo reported $331 million in search revenue against its owned and operated properties, an 8% decline from last year. Display-advertising dollars, meanwhile, rose 19% to 468 million, which also represents the largest line-item gain on the balance sheet. On the earnings call, Ms. Bartz noted the launch of original-content initiatives such as The Upshot, which features original reporting, drew a higher rate of clicks off the Yahoo homepage compared to content from its partners. This, along with the acquisition of Associated Content, may point to some traction in Yahoo's original media strategy.

"Right now, across all our media properties, the original content counts for about 10%," Jimmy Pitaro, head of the company's media division, told Ad Age in May. "We'd like to get to 20% of content being original over the next year."

Search revenue, however, was down, and that may be a function of a focus on building out other areas of the business, including display advertising. Yahoo will also employ its search partnership with Microsoft in October. Under terms of the arrangement, Yahoo will incorporate Microsoft's Bing search engine into its systems. The Redmond, Wash., software giant will index the web and will manage the self-serve ad system, while Yahoo will be responsible for selling search advertising to premium advertisers. Yahoo is already running a portion of searches through the Bing search engine for its testing phase.

Analysts on the call, meanwhile, appeared to be more concerned about Yahoo's display-advertising business despite the fact that Yahoo owns the biggest advertising network online, which reached 184.3 million people for the month of June, according to ComScore. That accounts for 85.7% of the total internet audience, but it's a fool's account to consider it the top spot, as AOL's ad network sits in second place by just a tenth of a percent, and Google, which reported its earnings last week, runs behind AOL with 84.7% of display ad viewers. Each one of the top three ad networks -- Yahoo, AOL and Google -- reach more than four-fifths of the measured online audience, suggesting they may all be effectively hitting the same people. As more and more marketers invest in blind ad buys by purchasing segments of the population as opposed to the sites or the destinations on which they read and watch, a network's massive size may have less appeal to advertisers (as well as audiences). An ad network that large doesn't compete against another large ad network so much as they share the same eyeballs, which effectively turns display networks into commodities.

The mammoth size of Yahoo's operations generally points to the fact that the company will only consume more properties in an effort to grow and leverage against any soft areas of its business. Ms. Bartz did not suggest any acquisitions or partnerships would immediately arise, but did indicate Yahoo is moving out of the cost-cutting phase. "We want to operate efficiently, certainly," she said. "But we're going to spend to grow the top line."

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