Yahoo Q2 Profits Soar on Web Ads, but Sales Fall Short

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Yahoo (NASDAQ: YHOO) on Tuesday reported second-quarter profits that topped analysts’ expectations, but overall sales fell short and company shares took a hit in after-hours trading.

For the quarter, Yahoo reported earnings of $0.15 per share, a penny higher than analysts were expecting and 53 percent ahead of the same period last year. Net income for the quarter totaled $213 million, 51 percent above last year’s mark.

But overall revenue, minus the fees paid out to advertising partners, fell short. Yahoo reported new revenue of $1.13 billion, missing the consensus forecast of $1.16 billion, according to polling by Thomson Reuters.

Shares of Yahoo were down more than 4 percent in extended trading.

Nevertheless, the company turned in healthy growth in its advertising business, with display revenues on Yahoo’s properties up 19 percent from the year-earlier period.

“We’re pleased that we continued to deliver strong operating income and margin expansion,” Yahoo CEO Carol Bartz said in a statement. “Our search fundamentals are improving and we posted another quarter of healthy display advertising growth.”

Speaking later on a conference call with financial analysts, Bartz said that the revenue softness was attributable in even measure to the search and display businesses.

“With regard to search, we gained share in the quarter, but we didn’t monetize searches as much as we expected,” she said. “On the display side, with our owned-and-operated sites, we saw healthy ad spend up 19 percent but the second week in June, we saw demand slow down and a handful of advertisers pull back.”

But that slowdown was short-lived, she said, assuring the analysts that spending resumed again in July, explaining that the large advertisers likely froze their ad budgets as the second quarter was ending to improve their balance sheets.

“The first three weeks in July indicate that we’re back to normal,” she said.

Under Bartz’s 18 months at the helm, Yahoo has been refocusing on the content across its network of sites, the backbone of its display-advertising business. In addition to expanding its staff of bloggers and reporters, the company has also been eyeing potential acquisition targets, and in May shelled out $100 million to buy Associated Content, a company that employs a vast network of freelance writers to produce articles assigned around popular search topics.

Aside from firing up its content mill, Yahoo has been taking a number of steps to introduce social features into its popular Web properties, such as search and e-mail.

That initiative has seen the company strike partnerships with social firms like Facebook and Twitter, enabling users to view and share content with their social networks on Yahoo’s Web properties.

On the search side of the business, Yahoo continues to press forward with the migration of its engineering platform to Microsoft’s Bing, while focusing its attention on sales, marketing and enhancing the user interface.

The company continues an aggressive advertising campaign promoting its search engine and other properties, a marketing blitz that aims to position Yahoo as a gateway to the Web.

Bartz said that the transition is “progressing very well,” and that the companies have begun early experiments integrating their search products. Microsoft has already begun performing a portion of Yahoo’s search queries, and the companies are hoping to see Microsoft take over the paid search operations by the fourth quarter, though Bartz said they will push that target back if there is any concern that technical hiccups could disrupt the ad platform in the all-important fourth quarter.

She said that Yahoo transitioned about 125 of its employees last quarter to Microsoft’s search division.

Kenneth Corbin is an associate editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.