Yahoo Misses Revenue Target on Softening Display Sales

Carol-Bartz

Slowing display ad growth combined with continued weak results from its search partnership with Microsoft led to falling revenue at Yahoo in the second quarter. It was the third straight quarter of declining sales at the beleaguered Web portal, and doesn't bode well for the company's turnaround efforts.

Excluding payments made to partner sites, Yahoo Tuesday reported revenue of $1.07 billion -- down 5% from a year ago and falling below the analysts' estimate of $1.11 billion.

Second-quarter net income rose 11% to $237 million -- or 18 cents per diluted share -- from $213 million, or 15 cents in the year-earlier period. Earnings were in line with Wall Street expectations.

The biggest surprise was the softening in display ad sales, which has been a relative strength for Yahoo as it seeks to hold off a growing challenge in the market from competitors including Google and Facebook. Display revenue, minus partner payments, fell 5% to $467 million in the quarter after increasing 10% in the previous quarter and 17% a year ago.

Analysts had expected display to grow again in the second quarter by double digits. In Yahoo's earnings conference call Tuesday, Yahoo CEO Carol Bartz blamed the company's broad sales force reorganization for the dip in display advertising rather than any change in the competitive landscape or the economy.

The internal disruption led to higher-than-expected turnover which impacted sales -- especially in the latter half of the quarter. "The issue was we didn't have enough salespeople in front of the big clients," she said.

Many of the changes stemmed from the hiring of former Fox Interactive Media head Ross Levinsohn last fall to run Yahoo's America's business, overseeing advertising, content and partnerships. The lack of up-to-speed sales staff in turn led to a heavier reliance on remnant inventory sold via platforms like Yahoo's Right Media Exchange than directly sold premium inventory.

Bartz and Yahoo CFO Tim Morse said the field sales force is now back to the level of six months ago, but acknowledged that the effects of the sales overhaul will last into the next quarter. Net revenue for the third quarter is expected to be in the range of $1,050 million to $1,100 million. That's below the $1.12 billion analysts had projected.

"It's part of the evolution of our turnaround efforts," said Bartz.

On the search side, revenue growth remained weak as the Yahoo-Microsoft alliance continued to fall short of expectations. Sales dropped 15% to $371 million compared to an 11% drop a year ago and 19% decline in the first quarter.

Bartz attributed the quarterly improvement to technical refinements to Microsoft's AdCenter platform that led to higher revenue-per-search (RPS) results. Under their 10-year agreement, Yahoo switched its search marketing platform for advertisers to the Microsoft system. The transition began in October with the U.S. and Canada.

But following the prior quarter, Bartz expressed disappointment with the AdCenter performance and halted the international rollout of the combined-search effort until problems could be sorted out. By addressing several "platform gaps and inefficiencies" during the quarter, she said the companies had improved paid-search monetization but upgrading would go on the rest of the year.

Bartz said Yahoo has completed the transition of organic search to Microsoft's system in five countries including the U.S., and the company plans to expand to the rest of the world markets this year. Yahoo expects to complete the transition to paid search in India this year, and will "solidify" the rollout schedule according to continued improvements in RPS. Microsoft is guaranteeing revenue for Yahoo during the transition through the first quarter of next year.

Yahoo's share of Internet searches in June was flat from May at 15.9%, according to comScore data. The combined Yahoo-Bing share as of last month was 30.3% compared to Google's commanding 65.5% share.

Search spending overall in the second quarter was up 8% from a year ago but slowed from the 17% growth of the first quarter, according to Efficient Frontier. Even so, Google last week reported strong second-quarter results, with profit up 36% from a year ago, and revenue growing 32% to $9.03 billion.

Analysts had also looked for Yahoo to provide further details on the handling of the company's Asia assets including Alibaba Group, the China-based Internet company in which it holds a 40% stake. In May, Yahoo said it was caught off guard after learning that Alibaba had transferred its online payments unit, Alipay, to a company controlled by Alibaba CEO Jack Ma.

Bartz on Tuesday only reiterated that Yahoo has reached an agreement in principle with Alibaba majority shareholder Softbank Corp. that ensures all parties involved are properly compensated for their Alipay stakes and that the payments unit is properly licensed in China.

After closing at $14.59 Tuesday, Yahoo shares were down about 2% to $14.26 in after-hours trading as investors responded to news of the company missing its revenue target.

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