Yahoo second-quarter earnings meet expectations

Net giant posts net income meeting expectations but lower than a year earlier on stock compensation expenses.

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
4 min read
Yahoo posted second-quarter net income that met analyst expectations but was lower than a year earlier on higher stock compensation expenses. Revenue was just shy of analyst estimates.

The stock fell 13.7 percent to $27.82 a share in after-hours trading on Tuesday from a closing price of $32.24 after the company announced that it was delaying the release of a new advertising platform that could help it better compete against search market leader Google.

Net income, including stock compensation expenses, was $164 million, or 11 cents a share, recorded under a new fair-value method. That compares with a year-ago figure of $755 million, or 51 cents a share--or $152 million, or 10 cents a share, under the fair value method. Stock compensation during the quarter was $73 million, up from $7 million in the year earlier quarter.

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Revenue for the quarter, which ended June 30, was $1.12 billion, excluding traffic acquisition costs, which are fees shared with partners. That's up 28 percent from $875 million a year earlier.

Analysts polled by Thomson Financial had expected Yahoo to post second-quarter earnings per share of 11 cents, including stock-based compensation expenses, on revenue of $1.14 billion, excluding traffic acquisition costs.

Yahoo adopted new accounting rules this year that require companies to record stock compensation expenses at fair value in the income statement.

During a conference call with analysts, Yahoo Chief Financial Officer Sue Decker reiterated full-year guidance for revenue excluding traffic acquisition costs of $4.6 billion to $4.85 billion and said third-quarter revenue would be between $1.1 billion and $1.2 billion. First Call analysts on average estimated third-quarter revenue would be $1.2 billion.

Executives said the launch of the company's new advertising platform is being pushed out to the first quarter of next year from the fourth quarter of this year to allow for adequate testing and user feedback and not because it has a lot of bugs that need fixing.

"The timeline we gave in May was probably too optimistic," Chief Operating Officer Dan Rosensweig told CNET News.com in a phone interview. "It is more important to get it right than to release it in a particular quarter."

Chief Executive Terry Semel addressed concerns over advertiser losses to click fraud, which occurs when pay-per-click ads are clicked on not to generate a sales lead or transaction, but by Web site publishers to earn revenue from ads they host or by companies that want to deplete the ad budgets of rivals.

"Yahoo is and always has been committed to protecting advertisers against click fraud," Semel said during the conference call. "We recently terminated relationships with publishers that didn't drive traffic that met our standards."

A federal judge gave preliminary approval last month to a click fraud settlement under which Yahoo would pay about $5 million in legal fees to advertisers. Google also has agreed to settle a click fraud lawsuit, but that $90 million settlement is being challenged in court by advertisers who claim the compensation is inadequate.

Yahoo's reach across the Internet is growing. The company's number of unique users rose 28 percent from a year ago to 412 million in the second quarter, and the number of active registered users rose 20 percent to 208 million, executives said. Meanwhile, the number of fee paying customers rose 42 percent to 14.3 million. Yahoo ended the quarter with 10,500 employees.

The results contained no surprises, Citigroup analyst Mark Mahaney wrote in a research note, "although branded advertising appears to have grown materially stronger than search advertising."

Last quarter, Yahoo's net income was down from a year earlier on higher stock compensation expenses but was in line with analyst expectations.

Yahoo is the second most popular search engine, with nearly 29 percent market share, behind Google's nearly 45 percent share, according to ComScore Networks.

Web traffic to Yahoo sites rose 9 percent in the second quarter from the previous year to a three-month average monthly unique audience of 105.7 million, according to Nielsen/NetRatings.

Online-advertising spending in the U.S. is expected to reach $16.7 billion this year, up more than 33 percent from last year, according to eMarketer. Online advertising represents less than 6 percent of total media, while paid search accounts for more than 40 percent of total online ad spending, eMarketer said.

Of the total $6.4 billion projected to be spent on paid search this year, Google will get 54 percent, and Yahoo's share will be 20 percent, according to eMarketer.