Yahoo revenue dips in Q2, shares fall 2%

SAN FRANCISCO: Yahoo Inc plugged some of the holes that were weakening its Internet search business in the second quarter, but revealed new challenges that hurt its display advertising business.

The Internet company reported a slight decline in net revenue in the second quarter, as efforts to restructure its sales force caused disruptions that crimped revenue.

Shares of Yahoo, which are down more than 20 percent since their 52-week high of $18.84 in mid-May, were down 2.3 percent at $14.26 in after hours trading.

"They're trying to fix a lot of problems that do need to be fixed, but unfortunately as they're fixing those problems, new ones are popping up," said Macquarie Research analyst Ben Schachter.

"At the end of the day it's another disappointment," he said of the company's second quarter results.

Chief Executive Officer Carol Bartz, who is halfway through a four-year contract, is confronting a number of challenges in her quest to revitalize the Internet pioneer, including setbacks in a search partnership with Microsoft and tensions with Chinese partner Alibaba Group.

Meanwhile, the company is facing tough competition from social networking giant Facebook. A recent report by research firm eMarketer predicted that Facebook will displace Yahoo this year and collect the biggest slice of online display advertising dollars in the United States.

In a conference call with analysts on Thursday, Bartz said the shortfall in its display advertising business was not due to changes in the competitive landscape or to worsening business conditions.

A restructuring of the sales force - aimed at positioning Yahoo for more robust growth in the future - led to greater than anticipated employee turnover and left Yahoo under-equipped to meet demand, she said.

"The issue was we did not have enough sales people in front of the big clients," said Bartz.

The company forecast third-quarter net revenue, which excludes the fees that Yahoo pays to partner websites, of between $1.05 billion and $1.1 billion.

Yahoo executives said the company continued to make progress in efforts to unlock value from its Asian assets, which include a roughly 40 percent stake in China's Alibaba Group.

Yahoo's rocky relationship with Alibaba has raised questions about the extent to which it could profit from those assets. In May it was revealed that Alibaba had abruptly handed Alipay -- one of Alibaba's crown jewels -- to a company controlled by Alibaba founder Jack Ma.

Alibaba has said the transfer was necessary to comply with new Chinese regulations that restrict foreign ownership in e-payment companies.

"We've been working on this negotiation continuously, in fact daily," said Bartz.

But, she added, "until every word is finalized and every document is signed we're simply not done."

THE SEARCH GAP

Yahoo reported net income of $237 million, or 18 cents a share, compared with $213 million, or 15 cents a share, in the year-earlier quarter. Analysts polled by Thomson Reuters I/B/E/S, on average, were looking for 18 cents.

Yahoo's results come a few days after Google, the world's No.1 Internet search engine, reported better-than-expected profit and revenue.

Yahoo Chief Financial Officer Tim Morse told Reuters that the company was making progress in rectifying some of the problems in its search partnership with Microsoft, which had hurt Yahoo's revenue per search.

Last quarter, Yahoo said its search partnership with Microsoft was taking longer than expected to pay off due to technical imperfections in the search advertising system. As a result, Yahoo said its revenue per search won't rise to levels it experienced pre-Microsoft until the end of the year.

"Of the gap that we identified as of the April call, we closed about 20 percent of it in this quarter," said Morse.

Search revenue declined 45 percent year-over-year to $467 million.

Yahoo said net revenue in the second quarter was roughly $1.1 billion, compared with $1.13 billion in the year-earlier period and in line with Wall Street expectations.

ThinkEquity analyst Aaron Kessler said the signs of progress on search were encouraging, but said the market would be watching what happens with the company's display business in the months ahead.

"It makes for a little more caution on the core business," he said. – Reuters