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April 18, 2007

After the close of trading yesterday, Yahoo said its overall net profit dropped 11 percent, on higher operating costs.

Yahoo's lower net earnings were caused by higher spending to better compete against its main rival Google.

Overall, sales and earnings at the Sunnyvale, California-based company were lower, but just short of what Wall Street analysts had expected.

Yahoo's board stated that net income for the first quarter fell to $142 million, or 10 cents a share, from $159.9 million, or 11 cents, in the corresponding 2006 period.

According to a Thomson Financial survey, Wall Street investors expected an overall profit of 11 cents a share.

For the quarter, Yahoo's sales increased 7 percent to $1.67 billion on stronger demand for the company's online display ads and a surge in sales of text-only search ads late in quarter, thanks to its new Panama search platform.

Excluding TAC (Traffic Acquision Costs) and overall fees Yahoo pays its affiliates, revenue totaled $1.18 billion, an increase of 9 percent from 2006, but less than the $1.21 billion expected by analysts.

The second largest search company also issued forecasts for its second quarter and annual sales that were within most analysts' expectations. "Since September 20, 2006, we have made clear our intention to greatly sharpen our focus," Yahoo Chief Executive Terry Semel said in a conference call after results were released.

Semel added "as I look forward, I see tremendous opportunities for this company, but there's still much more to do before we get there." Citigroup analyst Mark Mahaney said Yahoo's results "doesn't change our long-term thesis, although we had expected more near-term upside." Yahoo's results benefited from a new search technology it introduced to its U.S. advertisers in February, designed to help the company provide search results that are as relevant and profitable as Google's.

Panama's new features helped the company boost sales, but higher expenses also hit its bottom line. Operating expenses for the quarter increased to $789.2 million, or 47 percent of sales, from $707.9 million, or 45 percent, from the corresponding period of 2006.

TAC fees that Yahoo paid U.S. affiliates rose 2.2 percent from the last quarter, while fees that Yahoo pays overseas partners jumped 7.6 percent. Meanwhile, the revenue Yahoo generates for every search using its Internet search engine dipped in the quarter by about 7 percent, contributing to the quarter's less-than-expected profits.

According to a new report from comScore Networks, while Yahoo managed to keep its market share of Internet search stable through January and February, Yahoo's U.S. market share dipped in March to 27.5 percent from the 28.1 percent in February. Even with the March U.S. results, Yahoo is now firmly entrenched as the No. 2 provider of Internet search, a market that is still growing at a very healthy pace.

A bit like Google reported about six months ago, another negative during the quarter was Yahoo's effective tax rate, which rose to 45 percent, from just 43 percent previously. The increase "helped contribute to the earnings-per-share miss," Mahaney said.

Another of Yahoo's challenges is what to do about DoubleClick, the graphical Internet ad network and provider of consumer Internet behavior that Yahoo partners with. On Monday, Google acquired DoubleClick for $3.1 billion in cash. For Google, this acquisition gives it a leg up in a market for Internet graphical ads that it's had trouble gaining traction in.

As for Yahoo, the transaction means it'l soon be paying its chief rival for services, and at the same time, giving Google more insight into Yahoo's very own business. Yahoo's CFO Sue Decker said in an interview "it's an interesting question that we plan to address real soon. It's a totally different scenario now, and we are wondering if it makes sense to continue our partnership, but we haven't decided yet what to do."

When asked about a potential scenario in which Yahoo severs its DoubleClick partnership, Decker said "our position is this is a natural evolution in display ad market, one we anticipated and positioned ourselves for." She added that growth should come later in the year from the U.S. and international rollouts of Project Panama, and from new mobile services Yahoo intends to introduce.

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Source: CNN Money