Yahoo Q2 revenue drops as display ad business slows

Yahoo's total revenue took a steep dive in the second quarter as it struggled in display advertising, a core market where it has historically been a leader. The company managed to increase its profit by 11%, however.

Total revenue for the three months ending June 30 declined 23% year on year to $1.22 billion, Yahoo announced Tuesday. Subtracting the advertising commissions and fees it pays to partners, net revenue came in at $1.07 billion, down 5% from 2010's second quarter and below the $1.11 billion consensus estimate from analysts polled by Thomson Reuters.

Yahoo blamed the revenue shortfall on a variety of factors, including its search-advertising sharing agreement with Microsoft, which isn't yielding the results it expected; its divestiture of HotJobs; broadband deferred revenue amortization; and certain fee rate reductions.

Perhaps of more concern is the company's acknowledgement that its display ad business didn't perform as well as expected.

Yahoo has been a leader in display advertising since the late 1990s, but lately has faced tough competition from Facebook and Google, both of which are making strong runs in the market.

Display ad revenue, minus partner fees and commissions, grew only 5% year on year to $467 million. Search ad revenue was down 15% to $371 million.

While the display ad business performed as expected in the Asia Pacific and EMEA (Europe, Middle East and Asia) regions, it faltered in the Americas, particularly in the U.S., Yahoo CEO Carol Bartz said during a webcast to discuss the results.

"I'm not happy about our U.S. display performance," Bartz said.

The problem stemmed primarily from a major reorganization of the U.S. display-ad sales team in May, which caused a higher-than-expected turnover in staff, hurting sales in the latter half of the quarter, she said.

Yahoo expects the reorganization to boost display ad sales in the fourth quarter and next year, but the struggles will continue this quarter as new hires ramp up on their jobs, Bartz said.

Yahoo did grow its net income, however, by 11% to $237 million, and its earnings by 18% to $0.18 per share, matching the analysts' consensus estimate.

Bartz had nothing new to report about Alibaba Group's decision to spin off its online payment unit, Alipay. Yahoo continues to negotiate with Alibaba Group to get what it considers proper compensation for the divestiture, which Yahoo has said was carried out without its knowledge.

Alipay was spun off to a Chinese company controlled by Alibaba CEO Jack Ma. Yahoo holds a 43% stake in Alibaba Group, worth $2.32 billion as of March 31. Yahoo bought the stake for $1 billion in 2005, when it transferred management of its brand and services in China to Alibaba Group.

Yahoo is particularly concerned about any negative effect that the divestiture could have on Alibaba's Taobao e-commerce site, and consequently on Alibaba's overall value.

Bartz said the revenue-per-search that Yahoo gets from ads sold through Microsoft's AdCenter platform remains below expectations, but that the situation has improved and should reach expected levels by the end of the year.

Microsoft and Yahoo signed their 10-year search deal two years ago but didn't get regulatory clearance for it until early 2010. For the deal's first five years, Microsoft will get a 12% cut of paid clicks on the search sites of Yahoo and of Yahoo Web publisher partners.

When the deal was signed, Yahoo estimated that it would boost its annual operating income by $500 million, provide capital expenditure savings of $200 million and increase annual operating cash flow by $275 million.

The goal of the deal for Yahoo and Microsoft is to compete better against Google.

Bartz characterized Yahoo's second-quarter financial performance as a mixture of "good, encouraging and unsatisfying."

"We've made substantial progress transforming Yahoo but we want to be farther down the road than we are," she said.

Subtracting commissions and fees, Yahoo expects revenue to be in the range of $1.05 billion to $1.1 billion in the third quarter.

As has been the case for the past several years, Yahoo's latest quarterly financial report contrasted poorly with that of Google, which grew its total revenue by 32% in the second quarter to $9.03 billion. Subtracting fees and advertising commissions, Google's net revenue came in at $6.92 billion. Like Yahoo, most of Google's revenue comes from online advertising.

Google's net income was $2.51 billion, or $7.68 per share, compared to $1.84 billion, or $5.71 per share, in 2010's second quarter. On a pro forma basis, Google's net income was $2.85 billion, or $8.74 per share, compared with $2.08 billion, or $6.45 per share, in the second quarter of 2010.

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