Yahoo sees modest revenue growth in Q3

CEO Carol Bartz nonetheless expressed satisfaction with the results

Yahoo's revenue grew slightly in the third quarter, even though the online advertising market has rebounded this year, as the Internet pioneer's ability to turn its fortunes around remains in question.

Revenue for the quarter ended Sept. 30 rose two per cent from a year earlier, to $US1.6 billion. Excluding fees and commissions paid to partners, revenue was $1.12 billion, shy of the $1.13 billion expected by analysts polled by Thomson Financial.

Profits more than doubled, but primarily on the strength of a gain from the sale of HotJobs. Net income grew 113 percent to $396 million, while earnings per share were up 126 percent to $0.29.

On a pro forma basis, excluding one-time items like the HotJobs gain, net income was $225.9 million, or $.17 per share, exceeding analysts' consensus forecast by 2 cents.

Yahoo's online advertising revenue rose four per cent overall, driven by 17 per cent growth in display ad sales in Yahoo-owned sites but dragged down by a seven per cent decline in search ad sales. Fees revenue dropped 15 per cent.

Yahoo executives blamed the slide in search ad revenue on a decision by marketers to slow their spending while Yahoo transfers its search advertising platform to Microsoft as part of the company's search partnership.

That transition, which is under way, calls for Yahoo to rely on Microsoft's Bing both for back-end search infrastructure services like Web crawling, indexing and ranking, and for pay-per-click search ad sales.

"The main drag on our growth has been search revenue," said Yahoo CEO Carol Bartz during a conference call to discuss the results. She said she was confident the situation will stabilize and yield the expected benefits for Yahoo.

Per the terms of the agreement, Microsoft will take a 12 per cent cut of search ad sales from Yahoo sites in markets that have been transitioned to the Bing system. Yahoo expects to make up for that fee by attracting more people to its search pages via innovations in user-facing search services.

Yahoo is currently using Bing's back-end search system in the U.S. and Canada, and it is in the process of transitioning to the Microsoft search ad platform in those two countries, a process it expects to complete this month.

Asked about recent rumors that AOL is in talks with other firms to jointly acquire Yahoo, Bartz declined to comment, only saying: "We like our strategy and we like our progress and that's what we're focused on."

Bartz also declined to comment on Yahoo's reportedly volatile relationship with China's Alibaba, saying that Yahoo's 29 per cent stake in the Chinese company has been a very good investment and praising Alibaba's management.

Bartz expressed confidence that the turnaround strategy she has implemented since taking over as CEO in January 2009 is working and will yield the boost in revenue and profits that is her goal.

Among the initiatives Bartz has ushered in are a streamlining of Yahoo's corporate structure, a modernization and consolidation of its technology platform and a narrower but deeper focus on a few key areas like content, communications and ad sales, while divesting the company of noncore and underperforming businesses.

"We are relentless[ly] pounding at these initiatives," she said.

However, Yahoo's performance again paled in comparison to that of its main rival, Google, which generated revenue of $US7.29 billion in its third quarter, up 23 per cent year-on-year.

Google's net income grew 32 per cent to $2.17 billion, while earnings per share rose 31 per cent to $6.72. On a pro forma basis, Google's net income was $2.46 billion, or $7.64 per share, exceeding the analysts' consensus of $6.67 per share.

Yahoo and Google make most of their revenue from online advertising, a market that shrank a little in 2009 but has recovered in 2010.

In the U.S., online ad revenue grew 11.3 per cent to $US12.1 billion during the first six months of the year, compared with the same period in 2009, the Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers (PwC) said recently.

That is the market's highest revenue total for a first semester, putting 2010 on track to reach the market's highest annual level, according to the latest Internet Advertising Revenue Report, from the IAB and PwC.

Yahoo's stock closed at $15.49 on the Nasdaq Exchange, down 2.73 per cent, before the results were released Tuesday.

Operating margin doubled from six per cent to 12 per cent year-on-year. In the fourth quarter, Yahoo expects net revenue -- minus the fees and commissions it pays partners -- to be in the range of $1.125 billion to $1.225 billion and operating income to be in the range of $200 million to $280 million.

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