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Yahoo profits up, revenue still declining

It wasn't as bad as many had feared: Third-quarter revenue was down compared to last year but not as much as expected, and profits were much higher than forecast.

Yahoo revenue is still down compared to last year, but stabilized in the third quarter while profits surged. Yahoo

Updated 1:40 p.m. PDT with additional details from the release, and throughout at 3:45 p.m. PDT following the earnings call.

Yahoo's cost-cutting moves this year are starting to show up in the bottom line, as the company's third-quarter profit exceeded analyst expectations by a wide margin.

Revenue is still declining at Yahoo, which recorded $1.6 billion in revenue, down 12 percent from last year. Excluding traffic acquisition costs paid to partners, revenue was $1.1 billion, in line with analyst estimates.

But following several rounds of layoffs and belt-tightening, Yahoo's net income came in at $186 million, a 244 percent increase over last year's third-quarter net income of $54 million or $0.13 in earnings per share. And when you factor out special items, net income was $213 million or $0.15 in earnings per share. Analysts were looking for $0.07 in earnings per share on average, and even the most optimistic estimates didn't cross $0.10.

Some of the unexpected increase can be chalked up to Yahoo's decision to sell its 1 percent stake in during the quarter, on which it gained about $98 million. UBS analyst Brian Pitz estimated that one-time gain accounted for about $0.03 in earnings per share, according to Tech Trader Daily.

But Yahoo has shed 2,000 jobs since the third quarter of 2008, now employing 13,200 people around the world. It has signaled a willingness to cut further, currently in the process of shedding divisions of the company that it no longer considers important to focus on others.

CFO Tim Morse--who led the call unexpectedly after CEO Carol Bartz came down with the flu--said that Yahoo will continue to wring costs from anything and everything. "There's a change occurring at Yahoo that will value that kind of work," he said, referring to efforts to find more efficient ways of operating Yahoo's core properties.

Yahoo's results will give further credence to the notion that Internet advertising is coming back after a dreadful year.Google's financial results last week signaled such a shift was in place, and while Yahoo isn't nearly as strong in search advertising, it is a major player in display advertising, which was not expected to recover as quickly as search advertising.

Morse said that Yahoo is starting to see some "loosening" of ad spending budgets as the economy recovers. Still, Yahoo is still a long way away from the revenue heights it reached last year and the needle is not moving in the right direction just yet.

Search advertising declined by 19 percent in the third quarter to hit $354 million on Yahoo's owned and operated sites, while display advertising declined 8 percent to $399 million. The good-news/bad-news scenario here is that while the rate of decline in the display business is slowing down, the rate of decline in the search business is increasing, perhaps fallout from Yahoo's decision to enter into a pending agreement with Microsoft to outsource search on Yahoo sites.

Morse, however, preferred to focus on the results as compared to the second quarter of this year. Looking at it that way, display advertising grew slightly and search advertising declined slightly. That's not anything to get excited about, but it's not as bad a picture as painted by the year-over-year comparisons.

Getting back to the Microsoft deal, Morse said Yahoo still expects the deal to close early next year, reiterating the support the companies received Monday from the advertising industry. Yahoo knows the migration will take a while; it expects to move only one or two significant markets to the Microsoft search technology in 2009 if approved soon. However, Morse wryly noted that not only has Yahoo done this before--when it introduced its Panama search ad platform in 2007--but many of the engineers that worked on Panama now work for Microsoft.

The company said it expected to record between $1.6 billion and $1.7 billion in revenue during the upcoming fourth quarter, which would be a slight decrease compared to the fourth quarter of 2008. However, coming into the third quarter the financial community was only expecting Yahoo to record $1.2 billion during the fourth quarter.