Revenue down, profits up in Yahoo's Q4

Yahoo's revenue fell but profits grew in its fourth quarter, results which the company described as "encouraging" and as fueling a turnaround momentum.

Revenue came in at $1.53 billion in the quarter, ended Dec. 31, 2010, down 12% year on year. Subtracting the commissions and fees Yahoo pays to advertising partners, revenue was $1.21 billion, down 4% but slightly topping the consensus expectation of $1.19 billion from analysts polled by Thomson Financial.

Net income slightly more than doubled to $312 million, or $0.24 per share. On a pro forma basis, which excludes certain items, net income was $340.5 million, or $0.26 per share, $0.04 above analysts' consensus expectation.

During the fourth quarter, Yahoo continued to do well in its specialty, display advertising, but still struggled in search advertising, the most popular online ad format, which Google dominates. Yahoo's gross display ad revenue rose 14% to $635 million, while search ad revenue fell 27% to $640 million.

In a conference call, CEO Carol Bartz said the fourth quarter and 2010 overall had been "very encouraging," while Chief Financial Officer Tim Morse said he was proud of the results.

For the full year, Yahoo's gross revenue fell from $6.46 billion in 2009 to $6.32 billion in 2010, while net income more than doubled to $1.23 billion, or $0.90 per share.

Prior to reporting its fourth-quarter earnings, Yahoo announced it is cutting 1% of its global staff, or about 140 employees. Yahoo laid off 600 people, or about 4% of its global staff at the time, in December.

As of Dec. 31, Yahoo had 13,600 employees, down 2% year on year.

Bartz said the layoffs were necessary to reduce duplication and spending in areas considered non-strategic, but that the company plans to hire new people this year.

Yahoo expects revenue, minus partner commissions and fees, to be in the range of $1.02 billion to $1.08 billion in the first quarter of 2011, below the $1.13 billion it reported in the first quarter last year. It expects gross revenue of $1.15 billion to $1.23 billion, below the $1.59 billion in 2010's first quarter.

Search ad revenue was affected by the transition of Yahoo publishers and partners to Microsoft's AdCenter platform as part of the companies' wide-ranging search alliance.

"Publishers, including Yahoo, and affiliate partners had more bumps than expected as they learned to operate in the new unified marketplace," Bartz said. "As we enter 2011, the marketplace isn't producing the click yield and RPS [revenue per search] we had hoped."

However, Yahoo expects search ad revenue to stabilize and improve in the second half of this year, she said. Yahoo completed the transition to Microsoft's back-end search system and ad platform on schedule in the fourth quarter for the U.S. and Canada. Other countries and regions will be transferred during this year and in 2012.

"Optimizing the combined marketplace to maximize click yield and price-per-click will continue to be a critical focus for the entire first half of this year," Morse said.

Microsoft and Yahoo signed their 10-year search deal in mid-2009 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. Meanwhile, Yahoo will be in charge of selling premium guaranteed search ads on behalf of both companies, and will handle the one-on-one relationships with the biggest advertisers, search marketing firms, resellers and their clients.

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

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