Yahoo again sees profits slip; loss not as bad as some feared

By Michael Liedtke

Published: July 23, 2008

SAN FRANCISCO — Yahoo Inc.'s profit slipped again in the second quarter, a recurring theme that has frustrated shareholders and raised doubts about the Internet company's future.

While the results released Tuesday missed analyst expectations, the performance wasn't as bad as many investors feared after Internet search and advertising leader Google Inc. disappointed Wall Street with its second-quarter earnings last week.

What's more, Yahoo management maintained its revenue outlook for the remainder of 2008. The confident stance eased concerns about Yahoo's financial erosion worsening amid the dreary economy in the United States and parts of Europe.

Yahoo shares rebounded 38 cents in extended trading after falling 27 cents to finish Tuesday's regular session at $21.40.

The Sunnyvale, Calif.-based company earned $131 million, or 9 cents per share, from April through June. That was down 18 percent from $161 million, or 11 cents per share, at the same time last year.

Analysts had projected earnings of 11 cents per share in the most recent quarter, according to Thomson Financial.

A big chunk of the earnings shortfall stemmed from the bills that piled up as Yahoo dealt with an unsolicited takeover bid from Microsoft Corp. and a now-resolved battle for control of its board with investor Carl Icahn.

The drama cost Yahoo $22 million in the second quarter, mainly for outside advisers and related legal defense costs. Coupled with its first-quarter expenses, Yahoo has now spent $36 million on its wrestling match with Microsoft and Icahn.

Revenue for the quarter totaled $1.8 billion, a 6 percent improvement from $1.7 billion at the same time last year.

After subtracting commissions paid to Yahoo's advertising partners, revenue stood at $1.35 billion — about $20 million below the average analyst estimate.

Yahoo's latest lackluster performance of the past 2 1/2 years is likely to intensify the tremendous pressure on management to lift the company's long-slumping stock price after rebuffing Microsoft's $47.5 billion takeover offer.

With that bid off the table, Yahoo's market value is about $18 billion below Microsoft's last offer. Dismayed shareholders will get their chance to vent at Yahoo's annual meeting Aug. 1.

Yahoo Chief Executive Jerry Yang on Monday gained a little more time to deliver on his turnaround promises by negotiating a truce with Icahn, who had been threatening to overthrow the company's entire board so he could try to revive talks with Microsoft. Now Icahn and two of his allies will join an expanded board consisting of 11 directors.

"We are still looking at the best ways to drive shareholder value,” Yang told analysts during a Tuesday conference call.

Yang believes he can dramatically accelerate Yahoo's revenue growth during the next two years by extending the reach of its own online marketing network and drawing upon Google's superior technology to sell some ads on Yahoo's Web site.

If the proposed partnership isn't blocked by antitrust regulators, Yahoo hopes to start displaying some Google-generated ads in September. Management estimates the Google deal will boost Yahoo's annual revenue by $800 million.

But if Yahoo's profits continue to crumble, it could become vulnerable to another unsolicited takeover bid — this time at a price below Microsoft's last offer of $33 per share.

Weakening profits could also imperil Yang's status as chief executive, a job he took 13 months ago with Yahoo already mired in its financial funk.

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