Yang Upbeat Despite 2Q Profit Erosion

Jerry Yang of YahooBattling a Microsoft takeover attempt and a weakening economy, Yahoo posted a 19% drop in quarterly profit and net revenue that fell shy of Wall Street analysts' expectations of $1.37 billion.

Net income for the second quarter minus one-time charges fell to $139 million, or 10 cents a share, compared with $161 million, or 12 cents a share in the year-earlier period. It also missed the consensus earnings estimate of 11 cents of analysts surveyed by Thomson Financial.

Revenue, excluding payments to Yahoo's advertising partners, rose 8% from a year ago to $1.35 billion. Gross revenue grew 6% to $1.7 billion.

In a conference call Tuesday discussing the tumultuous quarter, Yahoo Co-founder and CEO Jerry Yang acknowledged the impact of the economic downturn on the Web giant's ad business. He said branded display advertising, especially in consumer packaged goods and finance, had "softened."

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But he sounded an optimistic note based on progress the company is making in performance-based advertising and new search initiatives including its pending outsourcing deal with Google. "We are executing and delivering against the strategy we laid out, even under extraordinary conditions," Yang said.

One reason he may have been feeling more upbeat was Yahoo's settlement Monday with dissident investor Carl Icahn, averting a showdown at the company's upcoming annual shareholder meeting Aug. 1.

Under the agreement, Yahoo will appoint Icahn and two other members of the alternative group of candidates he had nominated to its board of directors. Icahn, who holds a nearly 5% stake in the company, initiated the proxy fight two months ago in order to force Yahoo's merger with Microsoft.

Yang said that settling with the billionaire investor had "eliminated a distraction" and that he looked forward "to working with the new board members who will be joining us."

He also reiterated that Yahoo remains open to any "value-creating transactions" that provide real and tangible benefits to the company, without specifically referring to Microsoft.

Yahoo most recently rebuffed a joint proposal by Microsoft and Icahn to acquire its search business only after the software giant failed in its earlier bid to acquire the Web portal outright. Yahoo had rejected Microsoft's last acquisition offer of $33 a share in early May, but last week said it would be willing to sell at that price to Microsoft under the right terms.

Yahoo's second-quarter earnings aren't likely to reinvigorate negotiations with Microsoft, AOL or other potential merger partners. "We expect any shortfall to be only a minor short term negative to the stock as investors continue to await news around a deal," wrote Gene Munster, a senior research analyst at Piper Jaffray, in a preview of Yahoo's earnings report.

Given the struggling economy's impact on the earnings of ValueClick, BankRate and Microsoft, he and other analysts also expected Yahoo's results might be even softer than estimated. With display ad revenue accounting for 40% of it revenues, Yahoo is especially vulnerable to the ad slowdown.

The company reported display ad revenue from its own properties increased 11% during the quarter, compared to 16% during the first quarter. Yahoo CFO Blake Jorgenson cited continued softness in categories including finance, travel and retail, while pointing to strong growth in areas such as entertainment and technology.

Yahoo President Sue Decker said the company is on track with its Amp system for automating display advertising, testing it with two pilot customers, the San Francisco Chronicle and the San Jose Mercury News, and expects to roll out the platform more broadly with other newspaper partners during the third quarter.

The project, aimed at bringing search-like efficiency to display advertising, is expected to take three years to fully implement.

While acknowledging slowing growth in brand advertising, Decker said Yahoo continues to make strong gains in "non-guaranteed," or remnant, display advertising through its Right Media Exchange. She also said that during the quarter the company had exceeded its goal of increasing display ad volume annually by 12%.

On the search side, Decker said U.S. search revenues were up 19% on the strength of growth in query volume and revenue per share. She also noted Yahoo gained modest growth in May and June after hitting an all-time low of 20.4% in April.

The launch of new programs such as Search Monkey and BOSS (Build Your Own Search Service), meant to open up its search platform to outside developers, show that Yahoo is serious about competing in search, Decker said.

Regarding its April deal to let Google supply a portion of its paid search listings, Yahoo is about halfway through a 100-day antitrust review process with the Department of Justice. Financial estimates of an increase of $250 million to $450 million in operating cash flow during the first year of the deal remain unchanged.

Despite the deteriorating economic conditions, Yahoo also maintained its gross revenue outlook for the year at $7.35 billion to $7.85 billion. Third-quarter revenue is project at about $1.8 billion to $2 billion.

"Notwithstanding a more difficult economic environment than anticipated, and the substantial external swirl related to Microsoft, we are on track with expectations for 2008," said Decker.

In after hours trading, Yahoo shares were trading up more than 2% to $21.86.

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