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Yahoo profit doubles; shares tumble

Web giant reports profit of $112.5 million, meeting expectations. Shares drop in after-hours trading.

Yahoo on Wednesday reported earnings that met Wall Street analyst expectations, thanks to continued strength in its commercial search business.

The Web giant posted a profit of $112.5 million, or 8 cents per diluted share, for its fiscal second quarter, which ended June 30. That's up from $50.8 million, or 4 cents a share, in the same period last year, taking into account a 2-to-1 stock split, effective May 11. Revenue for the quarter was $609 million, excluding traffic acquisition costs (TAC), compared with $321 million a year ago.

Yahoo's stock fell in after-hours trading, down 14 percent to $28 a share shortly after the company reported earnings.

Wall Street expected Yahoo to earn 8 cents per share and $610 million in revenue, according to Thomson First Call's consensus of analyst estimates.

Much of the stock downturn stemmed from what Yahoo executives deemed as seasonal flatness in the commercial search business. Despite contributing significantly to Yahoo's revenue and profitability, Wall Street investors were hoping to see blowout results like last quarter.

"I believe investors have overestimated the growth in search," said Jordan Rohan, an equity analyst at Schwab Soundview Capital Markets.

The result is that the second and third fiscal quarters are expected to show slower growth, while the first and fourth could become boom periods for paid search. Still, Yahoo executives are satisfied with this quarter's numbers.

"To us, we're very happy," Yahoo CEO Terry Semel said in an interview. "We weren't at all surprised. Pricing is stable, everything is good."

Last quarter, Yahoo earned $101 million in profits, or 7 cents a share, after the stock split. Revenue for the period was $550 million.

Yahoo's earnings highlight revenue numbers that do not include TAC, which excludes the fees its Overture Services subsidiary pays to search partners. Companies such as CNN and Microsoft's MSN get a cut of revenue every time customers click on Overture's paid search listings. Executives consider TAC revenue less illustrative of Yahoo's true revenue potential.

Yahoo's total revenue including TAC reached $832.2 million for the quarter.

Yahoo's operating income before depreciation and amortization--formerly known as EBITDA--reached $234 million. Cash flow hit $250 million, while free cash flow reached $194 million from $71 million a year ago.

Here's a breakdown of Yahoo's various revenue generators:

• Marketing services: The business line, which encompasses the company's advertising revenue, posted $691 million, up from $635 million the previous quarter and $219 million a year ago. The results include revenue from Yahoo's acquisition of Overture, whose highly lucrative paid search business accounted for the bulk of this quarter's gains. The company did not break out how much of this revenue came from paid search and how much came from display advertising.

• Fees: Revenue from Yahoo's paid services businesses jumped to $104 million from $88 million last quarter and $70 million last year. Bulk paid subscriptions reached 6.4 million from 5.8 million last quarter and 3.5 million a year ago. Executives attributed the revenue difference to a price increase for SBC Communications' dial-up customers who also use Yahoo's services.

• Listings: This business, which largely consists of Yahoo's HotJobs subsidiary, reported $38 million in revenue. That's up from $34 million last quarter and $32 million a year ago.

Targeting Google
Yahoo has undergone a number of changes, many with archrival Google in mind. In June, the portal giant launched a redesign of its Web e-mail service and boosted free accounts from 4MB of memory to 100MB. The move was an attempt to counter the launch later this year of Google's free e-mail service, called Gmail, which will offer 1GB of storage.

Yahoo also offered a glimpse of its new home page design, which emphasizes its search engine and simplifies its layout. The company is testing a number of designs and soliciting feedback for its eventual launch later this year.

On the product side, the company in April released a flashier version of its popular instant messaging software. The launch illustrated the company's commitment to its free IM product. In June, however, the company scrapped its long-struggling IM product for corporations. Meanwhile, it also began shutting out third-party IM integration services such as Trillian and Gaim, causing many users to complain.