Yahoo continued to struggle with online ad sales in Q4

Revenue and net income both declined year on year

Yahoo struggled selling both display and search advertising in the fourth quarter, as its revenue and net income both dropped year on year.

Subtracting the commissions paid to partners, Yahoo's revenue fell 3 percent to US$1.17 billion in the quarter ended Dec. 31, missing the $1.19 billion consensus estimate from analysts polled by Thomson Reuters. Gross revenue dropped 13 percent to $1.32 billion.

Net income fell 5 percent to $296 million, although earnings per share were flat at $0.24, matching analysts' consensus estimate.

Scott Thompson, the former PayPal president who was recently appointed Yahoo CEO, put a positive spin on the results during a call with press and analysts. The company made progress in the quarter, he said, offering as evidence a 10 percent increase in operating income.

However, there's "no question" that Yahoo needs to do better, he said. "We need better execution to accelerate time to market and to better monetize the [user] engagement we have," he said.

Thompson was named CEO just three weeks ago and has been on the job only two weeks. He said it was too early to talk about specific changes he plans to make, but said Yahoo will pursue new "revenue streams."

That comment is sure to fuel speculation that Thompson may steer Yahoo into the e-commerce market that he knows so well from his tenure at PayPal, whose revenue grew from $1.8 billion to $4 billion while he was president.

Thompson said he'll focus on bringing "balance" and improvement to key areas of the business, including Yahoo's relationship with end users and advertisers; its ability to make decisions quickly based on data analysis; and the way it invests in current and long-term products.

Thompson feels "a sense of urgency" about mining Yahoo's business data, to help make decisions about areas like product development. "Our data may be Yahoo's single most underrated, underappreciated and under-used asset," he said.

Yahoo must improve its services so that end users increase the time they spend at its sites, and so advertisers increase their spending.

"We need to innovate and disrupt," he said.

CFO Tim Morse said Yahoo is in discussions to restructure its participation in Yahoo Japan and in China's Alibaba Group, but declined to give details.

For the full fiscal year, revenue came in at $5 billion, down 21 percent compared with 2010. Subtracting partner commissions, revenue was $4.4 billion, down 5 percent. Revenue for the full year was impacted in part by Yahoo's search advertising partnership with Microsoft, in which Yahoo pays Microsoft a commission on search ad sales and which includes a change in how Yahoo reports search ad revenue, the company said.

Advertising sales dropped across the board during the quarter for Yahoo. Subtracting commissions, display ad revenue fell 4 percent, while search ad revenue dropped 3 percent. Gross revenue fell 4 percent for display ads and 27 percent for search ads.

Yahoo's online ad sales performance contrasts with the overall market, which has been growing this year. For example, in the U.S. in the third quarter, online ad revenue grew 22 percent, according to the Interactive Advertising Bureau.

By comparison, Google, which makes most of its money from online ads as well, increased its revenue 25 percent in the fourth quarter.

For the full fiscal year, Yahoo's profit also fell, with net income shrinking from $1.23 billion, or $0.90 per share, to $1.05 billion, or $0.82 per share.

Yahoo has been in more turmoil than usual since Carol Bartz was fired as CEO in early September. There have been rumors that the board may sell the company entirely or in parts. Earlier this month, Thompson was brought on board to replace Bartz and last week co-founder Jerry Yang left the company.

Morse said that the quarter was the best so far in terms of sales and technology execution for Yahoo's search partnership with Microsoft, which in the first nine months of the year failed to yield expected revenue-per-search results.

The deal calls for Yahoo to rely on Microsoft's Bing search engine for site crawling, indexing and ranking and on Microsoft's AdCenter for self-service search ad sales, of which Microsoft takes a 12 percent cut. Yahoo is using the Microsoft systems in some countries, and will eventually transition fully on a global scale.

One of Thompson's biggest priorities is making sure Yahoo's core business -- display advertising -- returns to healthy growth. An unexpected drop in display ad sales is believed to have played a major part in the board's decision to dismiss Bartz, who had been CEO since January 2009. Sales suffered after a major reorganization of the display ad sales team led to higher-than-expected turnover.

Unique visitors to Yahoo properties and Yahoo-branded sites increased 12 percent. Page views fell 13 percent in communications and communities products, like Yahoo Mail, but minutes shot up 32 percent.

In media sites, like Yahoo News, page views and minutes grew 7 percent and 8 percent, respectively. Search engine page views and queries both fell 4 percent, Yahoo said.

Looking ahead, Yahoo expects revenue minus commissions to be $1.03 billion to $1.11 billion in 2012's first quarter, and gross revenue to be between $1.20 billion and $1.26 billion.

Juan Carlos Perez covers search, social media, online advertising, e-commerce, web application development, enterprise cloud collaboration suites and general technology breaking news for The IDG News Service. Follow Juan on Twitter at @JuanCPerezIDG.

Copyright © 2012 IDG Communications, Inc.

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