As Online Ad Spending Grows, Yahoo Is Not Sharing in the Bounty

Interim CEO Morse Gives No Update on Search for Replacement for Carol Bartz

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While Yahoo's third-quarter earnings contained no surprises, they also did nothing to lift the dark cloud hovering above the internet giant.

Revenue for the third quarter was $1.07 billion, down 5% from the third quarter last year, even though overall internet display advertising is up double digits. Net income plummeted to $293 million, a 26% drop year-over-year. On the bright side, the company beat analysts' estimates of earnings per share thanks to ongoing cost-cutting instituted under former CEO Carol Bartz.

While U.S. display ad spending is expected to grow 24.5% in 2011, according to eMarketer, Yahoo continues to post flat numbers in that area. Display revenue was $449 million in the third quarter compared to $448 million in the same period last year.

Search revenue dropped to $374 million from $428 million a year earlier. Yahoo is still transitioning some international markets to Microsoft's search technology as part of a partnership approved nearly two years ago. Yahoo said Microsoft has agreed to extend search revenue guarantees in the U.S. and Canada through March 2013

Yahoo interim CEO Tim Morse
Yahoo interim CEO Tim Morse

Yahoo interim CEO Tim Morse said premium display revenue was up in the low single digits and that the sales team sold more Yahoo premium homepage placements in the third quarter than they did in the previous quarter. Mr. Morse refused to comment on a report in the Wall Street Journal that Yahoo has been cutting pricing to close deals.

"I don't think our efforts with agencies and large advertisers are much different than ... over the last couple of years," he said. "We know we have to be easier to do business with."

Revenue on non-guaranteed, or non-premium, display advertising was "down a little bit," Mr. Morse said, with some weakness on the Yahoo Mail, Finance and News properties. Yahoo is facing more competition from Google, whose AdEx ad exchange now handles more online ad volume, according to sources on third-party trading desks who see inventory from both exchanges.

Mr. Morse was asked whether a proposed Yahoo-Microsoft-AOL partnership to sell each other's non-premium advertising could help. "I really don't have any comment on the potential of combining different companies' efforts here," he said. "In general, we see the need to continue to make improvements in non-premium market on the supply side ... and on the yield side."

Mr. Morse said that recent investments in video as well as the ABC News partnership will help create premium-advertising supply. As for non-premium supply, Mr. Morse said the company had to do a "better job of programming to direct our pageviews to the right places." On the yield side, he said improvements were needed in prediction algorithms and in increasing ad auction participation.

"We really need to see where all of this work on platforms and content strategy starts to really bear fruit and give us the revenue growth," he said.

Mr. Morse declined to give a timeline for the company's strategic review or for a new CEO hire. Last week, AllThingsD reported that Yahoo had retained Heidrick & Struggles to assist in the search, more than a month after firing Ms. Bartz.

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