Yahoo’s Profit Soars on Ad Revenue Jump

The Yahoo search engine continues to find black ink.

Yahoo Inc. said Wednesday that its second-quarter profit more than doubled to $50.8 million as revenue jumped 42% to $321.4 million. Results were powered by a boost in advertising, proceeds from companies paying to be highlighted in Web searches and fees from users for services such as larger e-mail storage capacity, online matchmaking and job listings.

A year earlier, the Sunnyvale, Calif.-based company’s profit was $21.4 million on revenue of $225.8 million.

“This was the biggest revenue quarter in the history of our company, and the second quarter is traditionally not a big quarter for the Internet,” Chief Executive Terry Semel said in an interview.

Yahoo also raised projections for the year. It said it expected revenue to be as high as $1.31 billion, compared with its previous forecast of $1.28 billion.

Yahoo’s stock, which has more than doubled since Jan. 1, closed at $35.29 a share, up 19 cents, on Nasdaq before the results were announced.

But shares fell about 4% at one point in after-hours trading. Although second-quarter earnings of 8 cents a share were generally in line with Wall Street estimates, a few investors had expected a bit more.

In addition, some analysts expressed a slight concern about an increase in the quarter in Yahoo’s costs and expenses, which climbed 18% to $258.6 million.

Yahoo attributed that rise to its recent acquisition of the Inktomi search firm, as well as such factors as higher insurance premiums and a new advertising campaign.

Still, analysts overall continue to be pleased with Yahoo’s turnaround under Semel, a former Hollywood executive. Yahoo hired the onetime co-chairman of Warner Bros. in 2001 to steer the company to recovery in the aftermath of the dot-com collapse.

“The numbers were great,” said Mark Zadell, an analyst with Blaylock & Partners in New York. “There are always going to be fits and starts in such a fast-growing business, but fundamentally everything is fine.”

Zadell said the drop in Yahoo’s stock in after-hours trading could be attributable to a slight retreat from Yahoo’s big run-up in price lately, which sharply increased Yahoo’s price-to-earnings multiple.

Ken Marlin, managing partner of New York investment bank Marlin & Associates, said that despite the healthy increase in advertising, Yahoo’s results showed that the company has avoided becoming overly dependent on any one business segment.

“All of it adds up to a revenue stream that is not only growing, but is diversified,” Marlin said.

Semel said the company was studying Microsoft Corp.’s move this week to stop issuing stock options, a key compensation method for Internet companies such as Yahoo. Microsoft made the announcement amid debate over how well the financial instruments provide appropriate incentives to employees, and also over the way companies account for them.

“We understand part of it, and don’t understand other parts. I believe, and always have believed, in stock options,” Semel said.

He said that Yahoo has continued benefiting from an alliance with telecom giant SBC Communications Inc., which packages Yahoo with its broadband services, especially after SBC lowered the price for the service. Yahoo recently announced a similar alliance in Britain with British Telecom.

Yahoo also has profited by attracting blue-chip advertisers, Semel said, such as carmakers, financial services and consumer product companies, as well as the Hollywood studios.

During the second quarter, Semel said, Yahoo promoted 53 movies.