Wheels Stay on Yahoo

But Softness in Package Goods, Finance Challenge Second-Quarter Earnings

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NEW YORK (AdAge.com) -- Softness in ad spending in consumer package goods and finance categories didn't help Yahoo's business this quarter, as President Sue Decker cited a "more difficult economic environment than anticipated."
Sue Decker
Sue Decker Credit: Yahoo

Finance was soft thanks to all the mortgage turmoil, and CPG was weaker than in the first quarter, presumably because many of the companies face slowing growth and margin pressures, said Yahoo. However, spending in the auto category was up strongly year-over-year, but not as much as in the first quarter, and while the travel category was relatively soft, it did improve from the first quarter, perhaps indicating its tide was turning. Both tech and retail held up "reasonably well," according to the portal.

Low expectations
It was a quarter in which analysts had low expectations for Yahoo, largely because of the weak performance of other online ad players. Yahoo came in on the low end of estimates, and its guidance was not as bad as some analysts expected.

Net income fell almost 19% to $131 million, or 9 cents per diluted share, compared with $161 million, or 11 cents a share, for the year-ago period.

"With sentiment and expectations heading into last night's call so low, Yahoo needed only to show that the wheels were not completely coming off," wrote UBS analyst Ben Schachter in a note, adding that they did indeed stay on.

Rising ad revenue
Ad revenue was up 7% to $1.6 billion, and revenue after factoring out traffic acquisition costs (money Yahoo pays to other sites) was up 8% to $1.3 million. Revenue from Yahoo's own sites grew 14% to just more than $1 billion; revenue from affiliate sites that are part of Yahoo's network was down 4% to $571 million. Yahoo cited 11% search-query growth (although query growth does not equal share growth), and said search revenue grew 19%.

The company played up small search-share gains ComScore recorded for it in May and June, its first consecutive-month gain in a year.

"We are not satisfied with this increase, given the share losses prior to that, but it comes on the back of the product innovations that we indicated to you would start to move the needle and we are committed to building on these gains," Ms. Decker said.

Yahoo has been in the middle of consolidation talks, publicly as a Microsoft takeover target and privately as a potential buyer of Time Warner's AOL, according to people familiar with the situation. When asked in an interview whether economic pressures could halt all the mergers-and-acquisitions talk in the sector, Ms. Decker said that market share is built in tough markets.

"I can't speculate on consolidation, but certainly Yahoo has been aggressive about acquiring assets that would supplement it, and our competitors have as well," she said. "In some ways in a tougher market environment, those companies that are committed to the road map will see meaningful gains."

Icahn dispute resolved
In addition to economic pressures, Yahoo also faced its own unique challenges, as financier Carl Icahn mounted a proxy fight that was settled yesterday, less than two weeks before Yahoo's Aug. 1 annual meeting. As part of the settlement, Yahoo gave Mr. Icahn a seat on its board and agreed to appoint two members of Mr. Icahn's proposed slate to the board, as well.

"I think Yahoo's ability to perform is especially impressive in light of the events surrounding the company this past year," said Yahoo CEO Jerry Yang. After cutting headcount by 500 employees in the first quarter, Yahoo added the same number in the second quarter.
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