Yahoo declares the glass to be half full

Despite competitive pressures and a hard economy, Yahoo believes things look good: the company boldly stuck by forecasts for its full-year performance.

Yahoo may have had some bumps in its second quarter, but it's not backing down from forecast for the rest of the year.

The Internet pioneer edged below analyst expectations for its second quarter for both revenue and earnings per share. Specifically, revenue excluding commissions increased 8 percent to $1.346 billion, shy of the $1.37 billion analysts had expected, and net income was 10 cents per share excluding various items, compared with 11 cents expected by analysts surveyed by Thomson Reuters.

Nothing major went wrong, but the company's performance ended up on the low end of a number of financial measurements. One big factor was economic troubles, which Chief Financial Officer Blake Jorgensen said resulted in "softness" for ads in the finance, travel, and retail sectors.

With that in mind, and given that even Google is starting to sound worried about the economy, it's notable that Yahoo wasn't more cautious with its forecast.

Yahoo narrowed its expected full-year revenue from the range of $7.2 billion to $8 billion it issued three months ago to $7.35 billion to $7.85 billion.

Apparently, Wall Street was willing to hear the overtones of optimism in Chief Executive Jerry Yang's words Thursday. Yahoo stock rose 59 cents, or nearly 3 percent, to $21.99 in after-hours trading.

Don't read too much into that, though. The trouble with measuring Yahoo by stock performance is that it's in a foaming sea of possibilities right now with Microsoft's attempt to acquire Yahoo, a deal under which top rival Google will supply search ads and as much as $800 million in new revenue , a major reorganization and executive exodus , and the company settling its differences with activist investor Carl Icahn . Watching the stock is enough to make you seasick, and who can say how many expectations and counter-expectations have been baked into the price?

Frankly, it's remarkable given the number and scale of distractions that Yahoo managed to make an earnings announcement at all. Such complications take a toll on employees, but Yahoo quantified the challenge, too: it spent $22 million on advisers and legal defense costs dealing with Microsoft and Icahn.

One reason that President Sue Decker sounded optimistic is that the company believes it's narrowing the gap with Google in how much money it makes off each search ad.

There are two basic varieties of online ads, the text ads that appear next to search results and the more traditional graphical "display" ads that mirror what you'd see on TV or in a magazine. With the former, advertisers pay only when a user clicks on the ad, but with the latter, the advertiser generally pays when it's shown. Yahoo's hope is to bring the two realms together with unified tools for advertisers and to make it easier to control the complexities of display-ad campaigns.

Yahoo does better than Google in display ads, so it's natural for the company to try to press its advantage there. But even if Yahoo does manage to fire up the display-ad market with better tools, don't expect Google to be left in the dust.

For one thing, Google has fired up its own display-ad work with the DoubleClick acquisition. For another, the search-ad market is twice as big, according to analysis firm eMarketer, which projects U.S. spending on online ads will increase from $25.9 billion this year to $41 billion in 2011. But display ads are a relatively small part of that, increasing from $5.5 billion to $7.9 billion over the same period while search ads--the market Google dominates--rises from $10.4 billion to $16 billion.

One interesting note on the call came with the discussion of the Google advertising partnership. It doesn't look like Yahoo is counting on money from that partnership this year.

To recap its expected effects, Yahoo expects up to $800 million in revenue and $250 million to $450 million in operating cash flow from the Google deal , it said when it announced the deal. Yang said Tuesday that the money will be used to "enhance financial results and be reinvested in the company."

But the Google deal is under antitrust scrutiny right now from the Justice Department, Congress, and the states, and Yang also used a conspicuously cautious term--"if" not "when"--to describe the expected schedule for the deal's going into effect.

"If we implement (it), it would be some time in the fourth quarter, it looks like," he said. That contrasts with the company's earlier statements that it needs nobody's permission to go ahead with the deal and that its three-and-a-half-month delay for antitrust review is purely voluntary.

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About the author

Stephen Shankland has been a reporter at CNET since 1998 and covers browsers, Web development, digital photography and new technology. In the past he has been CNET's beat reporter for Google, Yahoo, Linux, open-source software, servers and supercomputers. He has a soft spot in his heart for standards groups and I/O interfaces.

 

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