Yahoo's quarterly profit beats analyst expectations

Yahoo beat analyst estimates with a second-quarter profit of $141.4 million, or 10 cents a share, but its revenue dropped 13 percent from a year ago to $1.57 billion as search ad revenue declined from the first quarter.

Yahoo Chief Executive Carol Bartz said in a conference call that she was pleased with the results. "We're seeing less fear in the marketplace," she said, adding that the economy is "bumping along the bottom."

Bartz said Yahoo did a great job controlling costs and plans to ramp up spending on priority areas such as engineering, repositioning the company's brand with marketing, improving the efficiency of its advertising platform and getting rid of irritating and high-frequency ads that cheapen the Yahoo brand. The company expects the initiatives "to take $75 million in revenue out of our quarterly baseline," she said.

Yahoo saw strong demand from large advertisers for display ads and page views were up 7 percent, said Tim Morse, the new chief financial officer. "This is an encouraging sign, but we remain cautious about the economic environment overall," he said during the conference call.

Asked if the economy or ad sales have hit bottom yet, Morse told CNET News that seven of 10 different industry sectors in display advertising were up sequentially while all 10 categories were down in search. "It's too tough for us to tell," he said. "We're seeing a mixed bag in our results."

Analysts on the call expressed concern that revenue per search was down significantly compared with the first quarter and counter to what Google reported last week in its financial results.

Bartz said she didn't think it was a meaningful trend and noted that search volume was healthy. "What we're looking for is if we can increase our audience, which we know we can, we're going to drive both display and search revenue," she said.

Ross Sandler of RBC Capital Markets Corp. wasn't convinced. Executives gave a "macro environment rationale, where advertisers are seeing lower conversion rates and bidding less for fewer keywords and less per click than they were even a quarter ago," he said in an interview after the call. "The economy has got something to do with it but it still shouldn't have fallen off the cliff like that."

If not for the impact of currency rate fluctuations, revenue for the quarter ended June 30 would have declined only 8 percent from a year ago, Yahoo said.

Net income per share for the quarter compared with $131.2 million, or 9 cents per share, for the same period a year ago. Analysts on average were expecting income of 8 cents per share on revenue of $1.14 billion.

In addition to the currency issue, total revenue was reduced by the sale of Kelkoo late last year and lower fee revenue from voice over Internet Protocol, or VoIP, services, as well as subscription music offerings. Excluding the effects of these items, revenue would have declined 6 percent from a year ago.

Meanwhile, search advertising revenue dropped 15 percent, and display advertising revenue was down 14 percent. Total marketing services revenue declined 13 percent, and fee revenue was down 8 percent.

However, in after-hours trading, Yahoo's stock dropped 75 cents, or about 4 percent, to $16 per share.

Yahoo launched a new home page earlier Tuesday. The company also announced a deal with AT&T under which the telecommunications company will sell Yahoo display ads to local businesses in the United States, starting later this summer.

Yahoo recorded a $65 million net restructuring charge related to real estate, property, and equipment write-offs, personnel severance, and costs offset by a reversal of stock-based compensation expense for forfeited awards.

For the third quarter, Yahoo said it expects revenue between $1.45 billion and $1.55 billion.

The financial results come amid rumors that Yahoo is in renewed talks with Microsoft on a search ad deal. All Things Digital reports that a deal is imminent.

Asked by an analyst on the conference call about Microsoft's new Bing search project, Bartz said it was a good product. "I think Microsoft should be given kudos for Bing," she said. "I think they've done a good job."

Yahoo has 19.6 percent share in the search market, while Google has 65 percent and Microsoft has 8.4 percent share, according to ComScore.

Updated 3:58 p.m. PDT with background, quotes from conference call, and interview.