Yahoo Earnings Disappoint as Web Giant Struggles

Yahoo (YHOO) threw cold water on investors Tuesday, failing to deliver the second quarter earnings results investors had expected and falling short on other key metrics.

The search pioneer, which is looking to morph into a media giant with the aid of technology, managed to beat analysts second quarter earnings estimates by a penny, but in other key areas it came up short of expectations, dashing hopes that this quarter would mark the strongest performance by CEO Carol Bartz, who joined the company a little over 18 months ago.

A Painful Revenue Picture

Revenue for the quarter was up 2% to $1.6 billion compared with year ago, however, Wall Street was expecting slightly more, to the tune of $1.64 billion. But operating income and its display advertising took particularly large hits relative to analyst projections.

Yahoo's performance was particularly painful, given that Bartz considers revenues and operating margins key metrics that she uses to evaluate the company's performance, according to comments she made during an analyst conference call after the release of the quarterly results.

Yahoo's operating income climbed to $175.4 million in the quarter, up substantially from nearly $75.8 million a year ago. But analysts were expecting the company to bring in $178 million, according to a research note by Mark Mahaney of Citigroup Global Markets. Mahaney was expecting an even better performance of $180 million.

And as with any media company, advertising is Yahoo's bread-and-butter revenue source. But Yahoo posted lower than expected revenue growth from display advertising and paid search. In the quarter, Yahoo reported a 19% increase in display advertising for the websites it owns and operates, but Wall Street expected growth in the area of 20 to 23%. The company's paid search advertising growth was in the decline, as expected, but it tumbled more than expected. Paid search advertising fell 9%, compared to analysts expectations of a flat performance to a 5% drop, according to Mahaney's report.

Results on Display

Display advertising is increasingly important to Yahoo, as it transitions its paid search advertising to Microsoft's Bing over time, as part of is agreement with the software giant it struck last year.

Bartz said Yahoo had been on track with its display advertising for most of the quarter, but in the last half of June several of the company's larger advertisers pulled out as consumer confidence waned. She added, however, that in the first three weeks of July, the advertisers have come back and it appears to have been a blip.

Yahoo's paid search advertising struggled for most of the quarter but not enough to characterize it as a material slowdown, Bartz said.

Yahoo's arch-rival Google, on the other hand, beat analysts revenue forecasts when it reported its quarterly results earlier this month. Google's performance emboldened some analysts to expect similar news from Yahoo.

Profit Tops Predictions

For the quarter, Yahoo posted net income of $216.1 million, up from $143 million a year ago. The company generated earnings of 15 cents a share, betting Wall Street's estimate of 14 cents.

Investors were apparently spooked by Yahoo's third quarter outlook as well, sending its shares down 6.25% to $14.25 in aftermarket trading. Yahoo's said third quarter results are likely to stretch to a point far lower than some analysts' projections.

Yahoo expects to post revenues of $1.57 billion to $1.65 billion in the third quarter, although analysts had a target between $1.62 billion to $1.65 billion, according to Mahaney's report. Yahoo, meanwhile, says its third quarter operating income may land between $160 million to $200 million in the third quarter, compared with analysts predictions of $190 million to $200 million.