Yahoo Earnings Beat Wall Street Targets

Uses Quarterly Gains as Sign That Microsoft Acquisition Bid Undervalues Company

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NEW YORK ( -- Yahoo's first-quarter earnings were good enough to trump Wall Street estimates. Now the question is whether they're good enough to get Steve Ballmer & Co. to bump the price they're willing to pay for Yahoo.
Yahoo CEO Jerry Yang: 'The quarter's results underscore the fact that our strategy and investments are beginning to pay off.'
Yahoo CEO Jerry Yang: 'The quarter's results underscore the fact that our strategy and investments are beginning to pay off.' Credit: Zang Liwen

For first-quarter 2008, net income notched $542.2 million, or 37 cents a share, up from $142.4 million, or 10 cents a share, in first quarter 2007.

The Street was expecting Yahoo's revenue, minus traffic acquisition costs, to hit $1.32 billion and earnings per share of 9 cents; Yahoo delivered $1.35 billion and earnings per share of 11 cents.

Proprietary profits
Marketing-services revenue was $1.57 billion, a 7% increase over the same period the prior year. Incidentally, the biggest improvement came from Yahoo's owned-and-operated sites, where marketing-services revenue rose 18% to $966 million; marketing-services revenue on Yahoo's affiliate sites decreased 7%.

Yahoo executives admitted to some weakness in both search and display in the financial, travel and retail categories, with slower growth rates and, in some cases, modest declines. But, they asserted, other categories' growth has made up for it.

"The quarter's results underscore the fact that our strategy and investments are beginning to pay off," said CEO Jerry Yang. The results, he claimed, were "more remarkable" because they came despite a harsh economic environment and uncertainties stemming from Microsoft's announcement Feb. 1 that it would launch an unsolicited bid for Yahoo. Yahoo's board has since rejected the offer, believing it "substantially undervalues" the company -- and Mr. Yang said so to Microsoft CEO Steve Ballmer most recently in a letter dated April 7.

Mr. Yang addressed the bid on the earnings call, saying Yahoo has accelerated its innovation and gained traction in 2007 and believes that will continue. The board is open "to any and all alternatives, including a sale to Microsoft. We engage with major stockholders to highlight the value of our unique assets and have been expeditiously exploring strategic alternatives that we believe will help us achieve our overarching goal of maximizing stockholder value," he said.

Display ads surge
Display-ad revenue was a bright spot, Mr. Yang said, and both on and off Yahoo's network grew 25% year-over-year. Additionally, Yahoo is still improving its search-monetization rate -- President Sue Decker said the revenue Yahoo makes on each search was up about 15% globally year-over- year.

Yahoo reiterated several of its points of focus. It has been narrowing its content properties and services to those that are so-called starting points on the web -- areas like search, e-mail and important verticals such as finance and news.

Yahoo has also been opening its platform so that third-party developers can create applications to run on Yahoo; Ms. Decker said Yahoo this quarter would open up its search interface to developers so they can innovate on top of search. "As a result, users will soon enjoy search results as rich and dynamic as businesses and the community of developers can make them," she said.

She also reiterated the importance of building out an ad platform, saying that by making it easier for marketers to move ad dollars online, it would increase demand for inventory and create higher yields for publishers including, of course, Yahoo.

"Rather than working exclusively to sell our own ad inventory, we are focused on making it easier for advertisers, agencies, publishers and ad networks to do business with Yahoo and with one another at a scale across the entire spectrum of online advertising," she said.

On the staffing front, Yahoo's headcount dropped by about 500 to 13,800 employees during the first quarter; its 600 new hires were offset by layoffs resulting from a "workforce realignment."
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