Yahoo's profit down in Q2

Net income fell to US$131 million from US$161 million in 2007's second quarter.

Yahoo reported a modest revenue increase and a considerable drop in profit for its second quarter, along the way missing Wall Street's expectations in both categories, results that are unlikely to please its nervous shareholders.

Although Yahoo managed to defuse Carl Icahn's proxy fight this week, a rare victory in its months-long, tumultuous sparring match with shareholders and suitor Microsoft, its results for the quarter ended June 30, 2008, will probably do little to dispel doubts over its ability to survive as an independent company.

"We believe it is more efficient for Yahoo to be acquired. Scale is a competitive advantage. As a result, a combined Yahoo and Microsoft makes a great deal of sense," Financial analyst Clayton Moran from Stanford Group Company said in an e-mail interview after the results were released.

Asked whether he sees Yahoo as being on the right track or not, Moran, who has a "Hold" recommendation on the stock and a 12-month target of US$24 per share, said: "Yahoo is struggling with no clear solution to reignite growth."

Yahoo had revenue of US$1.798 billion, a 6 percent increase from 2007's second quarter, the company announced Tuesday. Deducting the commissions it pays to its ad network publishers, Yahoo had revenue of US$1.346 billion, up 8 percent but short of the US$1.374 billion consensus expectation from financial analysts polled by Thomson Financial.

Net income fell to US$131 million, or US$0.09 per share, from US$161 million, or US$0.11 per share, in 2007's second quarter.

On a pro forma basis, taking into account one-time items, net income was US$139 million, or US$0.10 per share, a penny short of analysts' consensus expectation. Yahoo had pro forma net income of US$163 million, or US$0.12 per share, in 2007's second quarter.

Still, Yahoo's top executives repeatedly said, during a conference call to discuss the results, that they were pleased with Yahoo's performance considering the challenges it has faced, including adverse economic conditions and the distractions of the Microsoft acquisition bid and the strident controversies it has generated.

"We're executing and delivering against the strategy we laid out, even under extraordinary conditions," said CEO Jerry Yang.

CFO Blake Jorgensen said the conversion of joint broadband deals with AT&T and Rogers Communications to a revenue-sharing format, in late 2007 and early 2008, have hurt Yahoo's revenue growth this year.

Yahoo also said it saw economic conditions affect advertising revenue, especially in categories such as finance, travel and retail.

Yahoo, which has been struggling on the financial and technology fronts for the past two years, has been embroiled in a corporate soap opera since Microsoft announced a bid to acquire the company in February.

That bid collapsed in May, leading to accusations from shareholders, including Icahn, that Yahoo's managers and board had purposely sabotaged the negotiations in order to protect their own financial interests, violating their fiduciary duty to shareholders.

Yahoo's management and board have denied the accusations, which have led to shareholder lawsuits, saying they negotiated in good faith and that ultimately it was Microsoft's decision to walk away. In the meantime, Yahoo has seen a steady parade of high-profile executives leave the company in recent months.

Yahoo this week managed to reach an agreement with Icahn, who had proposed an alternate slate of director candidates for the Aug. 1 shareholder meeting in order to unseat the entire board. By expanding the board and granting Icahn three seats, Yahoo convinced the billionaire investor to call off the plan. Icahn had indicated previously that his intention was to unseat Yang as Yahoo CEO and attempt to lure Microsoft back to the negotiating table, a possibility that now seems remote.

The proxy-contest settlement "eliminates the distractions and allows us to move forward," Yang said.

An attempt by Microsoft to acquire Yahoo's search advertising business also fell through, as Yahoo instead opted for an alternate deal to outsource part of that business to rival Google.

The deal with Google raised eyebrows, since Google's dominance in search advertising is a big reason why Yahoo has struggled financially. Search advertising makes up about 40 percent of all online ad spending, and Google has a stranglehold on that segment of the market.

By comparison to Yahoo, Google last week reported second-quarter revenue of USUS$5.37 billion, up 39 percent over the same quarter last year. Almost all of Google's revenue comes from search advertising. It earned US$4.63 per share.

The Yahoo/Google search ad outsourcing deal is being reviewed by U.S. regulators and hasn't been implemented yet.

Yahoo has said the deal with Google will give it a revenue boost while allowing Yahoo to continue honing its search advertising business, a key component of a broad advertising strategy that also includes the display ad formats, an area where Yahoo traditionally has been strong.

President Sue Decker said Yahoo is focusing on innovating in search technology, as opposed to trying to replicate the current models, because the company believes the search experience can be greatly improved.

For the third quarter, Yahoo expects revenue in the range of US$1.78 billion to US$1.98 billion, and for the full year between US$7.35 billion and US$7.85 billion. For the full-year forecast, Yahoo raised its minimum outlook from US$7.20 billion and dropped its maximum outlook from US$8 billion. That full-year forecast excludes the impact of certain items, such as a round of layoffs in the first quarter and costs associated with the Microsoft acquisition bid.

Yang said during the call that his management team and the board are focused on increasing shareholder value and are open to any alternative that advances that goal.

Judging by Yahoo's stock performance lately, it has its work cut out for it. Yahoo's stock closed at US$21.40 on Tuesday, down 1.25 percent. During the time of Microsoft's bid, Yahoo's stock once closed at nearly US$30. Microsoft's last offer for Yahoo was for US$33 per share, but Yahoo wanted US$37 per share, at which point Microsoft walked away in early May.

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