Yahoo Profit Soars; Shares Tumble
Good news was bad news Tuesday for Yahoo Inc., which took a beating in after-hours trading despite posting a nearly sevenfold increase in second-quarter profit.
Yahoo, which has consistently trounced Wall Street forecasts in recent quarters, missed analysts’ revenue expectations, barely matched earnings expectations and issued a tepid revenue forecast.
Investors hammered the company’s stock, driving it down more than 10% after the earnings announcement. Shares rose $1.15 to $37.73 in regular trading, then plunged to $33.90 after hours.
But several analysts said investors were overreacting. The second quarter, when people start spending less time on computers and more time outdoors, is typically slower for Internet businesses, they said. Wall Street may have simply expected too much.
“We have to calibrate the expectations,” said Safa Rashtchy, a senior Internet analyst with Piper Jaffray. “I don’t [see] this as a big miss or a big new trend in the market.”
Yahoo reported net income of $755 million, or 51 cents a share, compared with $113 million, or 8 cents, during the comparable period last year.
Chief Executive Terry Semel cited the continued flow of advertising dollars onto the Web, as well as an increase in the number of people paying Yahoo for such services as premium e-mail and Internet access.
Its holdings in rival Google Inc. proved a windfall: The company reaped a huge gain in the second quarter from the sale of Google shares that Yahoo received through an early investment and from the settlement of a patent infringement lawsuit after they became competitors.
Excluding the infusion of Google cash, Yahoo made $192 million, or 13 cents a share, matching the average estimate from 31 analysts polled by Thomson First Call.
Revenue rose 51% to $1.25 billion. Excluding commission fees paid to websites that run its ads, revenue was $875 million, below the analysts’ consensus estimate of $883 million.
Yahoo also raised its revenue forecast for the full year but not enough to exceed analysts’ previous forecasts.
“The results and guidance they offered were modestly disappointing given the heightened expectations,” said Derek Brown, a senior research analyst with Pacific Growth Equities. But this “doesn’t derail our underlying belief that the online ad market is very healthy and Yahoo is a key player.”
More than 87% of Yahoo’s revenue comes from online advertising, including banners and other display ads and simple text ads delivered with search-engine results. Online advertising spending increased 33% last year to $9.6 billion and is expected to grow nearly as much again this year.
Sunnyvale, Calif.-based Yahoo faces stiff competition in search advertising from Google, which is scheduled to report second-quarter earnings Thursday after the markets close.
In display advertising, Yahoo is facing increasing competition from Microsoft Corp.’s MSN division and Time Warner Inc.’s America Online, which is trying to increase its advertising revenue by attracting more Web surfers with services previously reserved for AOL subscribers.
Although generating only one-third of Yahoo’s advertising revenue, AOL in particular is mounting a challenge with the recent creation of original Web-only programs and the successful online broadcast of the Live 8 concerts.
During a conference call to discuss the earnings report, an analyst asked Semel what effect AOL’s moves would have on Yahoo.
“There’s no such thing as one broadcast [television] network, one cable network,” he said. “We think in an overall sense it will encourage big advertisers to step up” and buy more online ads.
