Yahoo Profit Up Sharply In First Quarter

Carol Bartz

Benefiting from a resurgence in brand advertising and gains from its search deal with Microsoft, Yahoo Tuesday more than doubled first-quarter earnings from a year ago.

The Web portal posted profit of $310 million, or 22 cents per share. That easily beat the consensus analyst expectation of 9 cents a share and was nearly triple the 8 cents a share Yahoo reported in the year-earlier period. Net income for the period came in at $1.13 billion, slightly below the analysts' estimate of $1.17 billion. Gross revenue of $1.6 billion was up 1% from a year ago.

Yahoo received a total of $78 million in reimbursement costs from Microsoft in connection with the search agreement -- $45 million in one-time "transitional" expenses and $35 million for search operating costs, an ongoing repayment stipulated in the pact. Along with the sale of its Zimbra unit, the Microsoft payments shave 7 cents from Yahoo's earnings.

"We had what I call a solid quarter," said company CEO Carol Bartz during a conference call with analysts, pointing to a 20% increase in display ad revenue as a sign that large advertisers have come back. With the economy rebounding, "advertisers' purse strings are starting to loosen up," she added.

On the search side, Yahoo had a bigger fall-off in sales than expected, but Bartz and Chief Financial Officer Tim Morse maintained that search market share had stabilized and would start to "trend up" in the coming quarters on the strength of product enhancements. Search ad revenue on Yahoo's owned-and-operated sites dropped 14% in the quarter, after showing some improvement over the prior two quarters. Yahoo blamed the decline on lower revenue-per-search.

The company's search query share increased slightly in March to 16.9% from 16.8%, according to recent data from comScore. With help from its Bing search engine, Microsoft increased its share to 11.7% from 11.5% while Google dipped to 65.1% from 65.5%.

Since Microsoft and Yahoo announced their 10-year deal last July challenging Google's hegemony in search, the two companies' combined search share has remained roughly the same at about 28%.

But Morse highlighted the gains that Yahoo has already reaped through the alliance in the form of Microsoft's reimbursement payments. He noted that the operational cost repayments under the deal will continue through the rest of the year at a rate of about $75 million to $85 million a quarter. "This is the first of ongoing savings relating to the alliance," he said of the $35 million installment Microsoft made in the first quarter.

Bartz also said the company was "deep into detailed planning" to ensure that the transition to Microsoft powering search on Yahoo provides advertisers, publishers and users with a quality experience. That changeover is to take place in the U.S. before the holiday season this year, but the process could be delayed to make sure things go smoothly, she said.

Bartz was especially pleased with the continued rise in display ad spending as brand advertisers pushed premium display sales up 24% in the quarter. "The display market is coming back, and with this comeback the quality of advertisers is on the rise and that means the quality of ads is also up," she said.

The CEO pointed out that Wal-Mart had launched its single-biggest digital ad campaign in February with Yahoo in a far-reaching effort aimed at moms.

Total online ad spending fell 3.4% last year to $22.7 billion, according to the Interactive Advertising Bureau, but analysts expect it to see at least single-digit growth in 2010.

Yahoo has also made a bigger push into branded entertainment in recent months, partnering with Hollywood production companies like Reveille Productions and ex-NBC programming head Ben Silverman's Electus.

Its most recent video offering is a Toyota-sponsored news show called "Who Knew?" featuring little-known facts about recent events. "Consumers love these videos and they're in very high demand from advertisers," said Bartz. She added that Yahoo expects to produce more branded content in areas like cooking and travel.

Overall, Yahoo expects to generate revenue of $1.6 billion to $1.68 billion in the second quarter, with income from operations in the range of $155 million to $195 million. Yahoo shares Tuesday closed down 0.5% at $18.38.

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