Yahoo earnings drop on slow ad sales

Third-quarter results meet lowered expectations with net income dropping greatly from a year ago. Fourth-quarter forecast lowered.

Elinor Mills Former Staff Writer
Elinor Mills covers Internet security and privacy. She joined CNET News in 2005 after working as a foreign correspondent for Reuters in Portugal and writing for The Industry Standard, the IDG News Service and the Associated Press.
Elinor Mills
3 min read
Yahoo posted third-quarter results that met lowered forecasts, with net income dropping greatly from a year ago on lower than expected ad sales.

"I am not satisfied with our current financial performance, and we intend to improve it," Yahoo Chief Executive Terry Semel said in a conference call with analysts. "We're lowering our fourth-quarter business outlook as well."

To reverse the trend, the company plans to close the gap with market leader Google on search monetization, widen its lead in graphical advertising, and push aggressively in the growth areas of social media, online video and mobile, he said.

Yahoo's new search advertising platform, dubbed "Panama," which was delayed by one quarter, is live as of Tuesday, Semel said. The marketplace design for the service, which will include more factors for ranking ads, is on track to be offered in the United States in the first quarter, he said.

I am not satisfied with our current financial performance and we intend to improve it.
--Yahoo Chief Executive Terry Semel

Word of the platform's availability may have driven the company's stock up more than 5 percent in after-hours trade, to $25.40 a share.

"We are responding aggressively to shifts in market dynamics in the graphical (advertising) segment," Semel said. "In Q3 we saw a reduction in spending by certain clients" due to company-specific issues.

Net income for the third quarter, including stock compensation expenses, was $159 million, or 11 cents a share. That compares with a year-ago figure of $254 million, or 17 cents a share. Stock-based compensation expense was $80 million in the third quarter.

Revenue for the quarter, which ended Sept. 30, was $1.12 billion, excluding traffic acquisition costs, which are fees shared with content partners. That is a 20 percent increase from the $932 million in revenue recorded a year earlier.

Analysts polled by Thomson Financial were expecting Yahoo to post third-quarter earnings per share of 11 cents, including stock-based compensation expenses, and revenue of $1.14 billion, excluding traffic acquisition costs.

Yahoo had warned in September that its third-quarter revenue would be at the bottom half of its forecast range because of weakness in auto and financial services advertising. The forecast had been for revenue of $1.12 billion to $1.23 billion, excluding traffic acquisition costs.

Yahoo forecast fourth-quarter revenue, excluding revenue shared with partners, to be between $1.145 billion to $1.265 billion. Analysts had been expecting revenue of $1.3 billion. For the full year, Yahoo was expecting revenue, excluding revenue shared with partners, to be between $4.477 billion and $4.597 billion.

In an interview following the conference call, Yahoo Chief Operating Officer Dan Rosensweig said the lowered forecast did not imply longer-term financial woes, but more of a conclusion to the slowed sales with certain large advertisers in the third quarter. "There were a couple of sectors where things imploded," he said. "Over time it will be resolved."

Yahoo's stock, which has dropped nearly 40 percent this year, closed at $24.18 a share.

Earlier on Tuesday, Yahoo announced investments in two online ad companies. It is acquiring AdInterax, which offers tools allowing marketers to create multimedia ads. Yahoo also is leading a $45 million Series B financing round in Right Media, giving it a 20 percent stake. Right Media operates a real-time online ad auction network called the Right Media Exchange.

Rosensweig declined to comment on rumors that Yahoo is considering buying social-networking site Facebook.

Yahoo has made more than 30 acquisitions valued at more than $5.5 billion during the past five years, Chief Financial Officer Sue Decker said during the conference call. Going forward, the company plans to invest in marketing, partner with global leaders to expand distribution of Yahoo services, and make small and large acquisitions, she said.

Although Yahoo has lost overall search market share to Google, Web traffic to Yahoo rose 7 percent in the third quarter from a year earlier, with Yahoo Video growing the fastest, followed by Yahoo TV and Yahoo Real Estate, according to figures released on Tuesday by Nielsen/NetRatings.

Yahoo is expected to account for 18 percent of the U.S. Internet ad revenue share in 2006, down from 19.4 percent last year, and less than Google's expected 25 percent share for 2006, according to eMarketer.