Yahoo Q2 profit beats Street; disappointing ad spending makes shares drop

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Yahoo CFO Tim Morse said the company suffered from "big customer weakness" among its display advertisers in the US, some of whom pushed back orders towards the end of June, to July.

"It has definitely made us incrementally a little bit more cautious," Morse said, adding that the company "have plenty of work to do."

The company also said its search business or search-based ad sales declined 8 percent compared to year ago period, after a 14 percent slide in the January-March period. Yahoo lags Google Inc. in the profitable search business and Morse said that the company's revenue from search business was lower than expected.

Looking ahead, Yahoo gave a cautious guidance, saying it isn't certain whether revenue will rise in the third quarter. The company expects its revenue to be in the range of $1.57 billion to $1.65 billion in the third quarter or between $1.09 billion and $1.19 billion in net revenue. Analysts expected third quarter net revenue of $1.17 billion.

Yahoo also said income from operations for the third quarter would likely fall between $160 million and $200 million.

Though Yahoo said it "posted another quarter of healthy display advertising growth," market analysts said they were disappointed by Yahoo's results and guidance as the company showed fewer benefits than its competitors from a broad recovery in display advertising. Though Yahoo boasts of clients like Target Corp., Ford Motors Co. and Wal-Mart Stores Inc. that advertise on Yahoo website, revenue in this display advertising segment rose only 19 percent compared to year ago period to $468 million.

Shares of Sunnyvale, California-based Yahoo, which boasts that 600 million people use its home page, email service or other products every month, were down 6.12 percent at $14.27 during after-hours trade on the Nasdaq. The company's shares closed up 0.66 percent at $15.20 on Tuesday.

"We knew revenue was going to be a challenge this quarter," said BGC Partners analyst Colin Gillis. "Revenue is always a challenge at Yahoo."

Though Yahoo CEO Bartz tried to alleviate concerns during a conference call with analysts, saying "the first three weeks in July indicate we're back to normal" after a disappointing June, analysts said they were concerned about the growth in the number of Yahoo Web pages viewed by its users, known as "user engagement," which dropped 4 percent from the same period last year, after slowing to zero during the first quarter of 2010. Those rates are down from nearly 20 percent positive growth seen two years earlier.

Analysts also said they were concerned about the drop in the value of advertising against content that Yahoo pulls from other sources.

Though a "search alliance" with Microsoft will allow Yahoo to use Bing search engine and help it increase the ad revenue earned per search query, analysts said Yahoo is still far away from making a dent in rival Google Inc's Internet search based market share. According to ComScore, Google had more than triple Yahoo's US market share of online searches last month, while Microsoft ranked a poor third.

Oppenheimer & Co. analyst Jason Helfstein said investors fretted about the company's performance as "their search business is losing (market) share and is in decline."

Yahoo isn't "cutting enough costs to offset that," the analyst said.

Agrees FBR Capital Markets Corp. analyst Heath Terry. "What they need are people staying up late, spending time on Yahoo," Terry said. "From all the numbers that we see, that’s just not happening."

Analysts also said Yahoo would have fared better in the second quarter had the European debt crisis not weakened euro against the dollar. Yahoo gets 29 percent of its revenue from business outside the US and the changes in currency rates translated into fewer dollars from overseas advertising compared with year ago period, the analysts said.

However, analysts said they are optimistic that Yahoo will fare better in coming months.

"The future of a lot of advertising is in brand focused and display, and that is their strength," eMarketer analyst David Hallerman said. "The search side might wither away, but Yahoo is not the first place people think of when searching."

According to Hallerman, Yahoo's strategic partnerships and acquisitions will help it emerge a stronger company in the near future.

Besides using Microsoft's Bing to power its search feature, Yahoo said, in May, it would host social games on its home page from Zynga Game Network Inc., including "FarmVille" and "Mafia Wars." Zynga has more than 235 million active users.

On the social front, Yahoo, in the second quarter, "deepened its integration" with Facebook, the world's largest social networking site, through Yahoo! Pulse, which lets users link the two accounts and share updates with friends across both networks.

The company also acquired Associated Content Inc., a hyped content start-up, for $100 million in May as well as Koprol, an Indonesian location-based social network.

Yahoo also made several moves in the mobile realm. The company launched a mail and messaging system for the Android mobile operating system, as well as HTML mail and news sites for the Apple iPhone.

Bartz is also trying to bring advertisers back by giving people more reasons to stay on Yahoo for longer periods of time. The company is now focused on presenting the web's most comprehensive package of news, sports, entertainment and finance coverage while also providing tools that enable people to view their individual accounts on Facebook and Twitter.