Yahoo Earnings Beat Analyst Estimates

In Midst of Transition, Web Giant Reports 5% Profit Drop in Third Quarter

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NEW YORK ( -- Yahoo shares jumped after the market's close yesterday as the company's third-quarter earnings beat analysts' expectations.
CEO Jerry Yang: Wants to 'attract the most developers.'
CEO Jerry Yang: Wants to 'attract the most developers.' Credit: Tony Avelar

While the company reported a profit drop of 5% in the third quarter, its results beat analysts' estimates -- showing that managing expectations can be an important tool in a time of transition. The earnings report comes just three months after new CEO Jerry Yang announced senior management would re-examine Yahoo's business as part of a 100-day plan in which there would be "no sacred cows."

Yahoo reported third-quarter net income of $151 million, or 11 cents per share, compared with $159 million, or 11 cents per diluted share, for the same period a year earlier.

Corporate introspection
Three months of corporate introspection resulted in three multiyear objectives, Mr. Yang said. First, Yahoo will concentrate its consumer-facing business on "internet starting points." He cited Yahoo's home page, My Yahoo, Yahoo Mail and search as the four key starting points at the company and said Yahoo will prioritize its talent and resources based on investing in and improving its starting points. He also said areas in which Yahoo is a market leader, including news, sports and finance, would remain important at the company. Consumer products that don't fall into the starting-point equation -- such as the recently shuttered subscription music business -- will not get additional resources or will be eliminated.

Second, Mr. Yang said, Yahoo will concentrate on being a must-buy for the most advertisers. He talked about Yahoo's move from selling ads on its owned and operated properties to selling ads across the web.

The third objective is to build more Yahoo products on open platforms on other sites and create a more flexible infrastructure so developers can build applications on Yahoo. Yahoo, Mr. Yang said, wants to "attract the most developers, for which we will allow for rapid delivery of new products and services from third parties to our consumers and customers." In the past the company has made it unintentionally difficult for developers to build on Yahoo's technology and data platform. That, he said, will change.

All about relevance
Yahoo President Sue Decker stressed Yahoo's increased emphasis on relevant advertising, even suggesting that the Yahoo home page -- long one of the few shining examples of a single online unit with massive reach -- could, in fact, favor relevancy over scale.

"As a simple example, we want to move to a place that will show 'American Idol' in the today module to 'American Idol' fans and World Series highlights to baseball fans rather than showing the same content on the home page to everyone, as we do today," she said.

She also noted that social networking and new publishing tools have fragmented user attention online; search is the opposite, becoming more concentrated with the top two players, Yahoo and Google. As a result, there is far more upside in off-network display than in off-network search.

According to Yahoo's research, she said, the display-ad market is expected to grow 20% to 25% in the U.S. this year. Pure networks and exchanges are on track to grow much faster, while non-network sites are expected to lag with only 10% to 15% growth.

Yahoo used its earnings day to announce a few new additions to its growing display-ad network, including, Ziff Davis and WebMD. (Yahoo also will handle search advertising for WebMD.) Under the agreement, Forbes will be able to target and sell users on Yahoo, and Yahoo will be able to target its financial users on
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