Yahoo's Q2 revenue falls short of expectations

Yahoo matched Wall Street's earnings expectations but missed on the revenue side in its second quarter, ended June 30.

Yahoo's revenue grew 51 percent to US$1.25 billion compared with 2004's second quarter, the company said in a statement Tuesday. Excluding the money that Yahoo pays to third-party affiliates of its online ad network, revenue grew 44 percent to US$875 million, short of the US$882 million consensus expectation from financial analysts polled by Thomson First Call. These third-party payments are commonly referred to as traffic acquisition costs (TACs).

Meanwhile, Yahoo, a provider of online content and services, had net income of US$755 million, or US$0.51 per share. Excluding US$563 million, or US$0.38 per share, from the sale of an investment, Yahoo had net income of US$192 million and earnings per share of US$0.13, matching financial analysts' consensus expectation. This compares with net income of US$113 million, or US$0.08 per share, in the second quarter of 2004.

Despite missing Wall Street's revenue expectation, Yahoo executives said they were pleased with the company's performance during the quarter.

"We have a balanced and healthy business model in which all parts are performing very well. We believe we're in a position of strength as rapid adoption of the Internet among consumers and advertisers keeps growing and Yahoo forms deeper relationships with both," said Terry Semel, Yahoo's chairman and chief executive officer, during a conference call Tuesday to discuss the results.

"We're really pleased with our second quarter results, because they clearly underscore two fundamental business model strengths: excellent growth and great balance," said Susan Decker, Yahoo's chief financial officer.

Yahoo makes its money from selling online advertising and from fees it charges users of some of its online services. In the second quarter, revenue excluding TACs broke down into US$716.4 million in online advertising and US$158.7 million in fees, up 43 percent and 45 percent respectively. Geographically, US$660 million in revenue excluding TACs came from the U.S., and US$215.1 million from abroad, up 39 percent and 59 percent respectively.

Yahoo ended the quarter with 379 million unique users, up 26 percent from 2004's second quarter. Of the 379 million, 181 million were active registered users, up 23 percent. Active registered users are those who have signed up for at least one Yahoo service, such as e-mail, and who visit the Yahoo network at least once per month. Among the active registered users, 10.1 million were fee-paying users, up 58 percent.

Yahoo ended the quarter with 8,780 employees, up 35 percent from the head count in the second quarter of 2004.

Looking ahead, Yahoo revised its revenue, excluding TAC, from a range of between US$3.56 billion and US$3.71 billion to a range of between US$3.60 billion and US$3.70 billion for the full fiscal year. The company expects that in the third quarter revenue, excluding TAC, will fall in the range of US$880 million to US$930 million.

Asked how America Online's strategy of significantly beefing up its free Web portal will affect Yahoo's business, Semel said he believes that if AOL succeeds in its plans, the effect for the overall online ad market will be positive. It would further validate the efficacy of online advertising, and advertisers will see the AOL portal as another channel they need to spend in, he said.

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