Yahoo Q1 revenue flat, profit rises

Its CEO describes the quarter as "good" and highlights growth in display advertising

Yahoo's revenue grew slightly in the first quarter of 2010 but profits rose more strongly, as the company's display advertising business performed to management's satisfaction.

Yahoo had revenue of US$1.59 billion in the first quarter of 2010, ended March 31, up 1 percent compared with the first quarter of 2009, the company said Tuesday. Subtracting commissions and other fees paid to partners, revenue was $1.13 billion, below the $1.17 billion consensus expectation from analysts polled by Thomson Financial.

Net income came in at $310 million, or $0.22 per share, up from $118 million, or $0.08 per share. In the first quarter of 2010, Yahoo got a $0.05-per-share benefit from the sale of Zimbra and a $0.02-per-share benefit from reimbursements made by Microsoft related to the companies' search deal.

On a pro forma basis, which excludes certain items, net income was $218.84 million, or $0.15 per share, six cents more than analysts expected and up from $123.11 million, or $0.09 per share, one year ago.

"We delivered what I call a solid quarter. Revenue stabilized and profits were up," said CEO Carol Bartz in a conference call to discuss the financial results

She highlighted a 20 percent growth in display advertising revenue in Yahoo sites, including a 24 percent boost from "guaranteed" display ads, which are pricier ad units for which marketers pay a premium.

The growth in these premium display ads was driven by large advertisers that are loosening their marketing purse strings as the economy improves, she said. "We're well-positioned to benefit from this trend," Bartz said.

Search ad revenue in Yahoo sites fell 14 percent, but Bartz put a positive spin on this, saying she's confident the company will improve in this segment. "We've stabilized our search share and believe it'll trend up in Q2," she said. Search ad revenue fell year-on-year 15 percent, 19 percent and 15 percent in 2009's second, third and fourth quarters, respectively.

Chief Financial Officer Tim Morse said that revenue per search improved sequentially for the second straight quarter, helped by a 2 percent revenue growth from 2009's fourth quarter in the U.S. "That's particularly significant given that the December quarter is traditionally the strongest for monetization, typically followed by a lower Q1," Morse said.

Ad revenue from affiliate sites grew 7 percent during the quarter. In all, ad revenue from Yahoo and affiliate sites grew a combined 3 percent.

That was offset by fees, the small non-advertising portion of Yahoo's revenue, which dropped 11 percent to $174 million.

Yahoo's total revenue fell 6 percent in the U.S. but grew 21 percent abroad.

Yahoo ended the quarter with 14,200 employees, 300 more than in 2009's fourth quarter.

In the first quarter, Yahoo saw a net benefit of $78 million from Microsoft reimbursements related to the companies' search deal, which got regulatory approval in the U.S. and Europe in February.

That 10-year deal calls for Yahoo to use Microsoft's Bing search engine for back-end functions like crawling, ranking and indexing Web sites. Yahoo will continue to be in charge of its search user interface.

The deal also calls for Microsoft to be in charge of self-serve, search ad sales, while Yahoo will manage premium search ad sales.

Implementing fully the search deal could take about two years. In the meantime, Microsoft will reimburse Yahoo for transition and operating costs. Yahoo expects net reimbursements from Microsoft of between $75 million and $85 million per quarter for the remainder of 2010.

A key motivation for Yahoo to enter into the search deal with Microsoft was to reduce its search-related costs. In addition, the companies believe they will be able to offer a more attractive option to advertisers together than individually, and thus be a more credible competitor to Google, which broadly dominates search usage and advertising globally.

Yahoo ended the quarter with free cash flow of $64 million, down 70 percent from 2009's first quarter, and with cash, cash equivalents, and investments in marketable debt securities of $4.24 billion, down $274 million from 2009's fourth quarter.

Yahoo expects revenue in the second quarter of 2010 to be between $1.60 billion and $1.68 billion. Commissions and fees paid to partners should be between $475 million and $495 million.

Morse said key signs point to an improvement in Yahoo's financial performance, including the first quarter's revenue increase after the company's revenue fell year-on-year all four quarters of 2009.

"Our underlying business performance is clearly improving. Our revenue is returning to year-over-year growth, led by display. We're transforming our cost structure to support our growth and profitability objectives, and our earnings metrics are showing substantial gains versus last year," Morse said.

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