Yahoo Sees Net Income Drop 38%

Times Staff Writer

Yahoo Inc. reported a second straight quarter of disappointing financial results Tuesday, but gave investors some hope for a rebound.

The company said it had started testing a much-anticipated Web search system designed to compete against its biggest rival, Google Inc.

Yahoo’s shares rose as much as 5% in after-hours trading Tuesday even though the company said the new system wouldn’t help its bottom line until next spring. Yahoo announced its earnings after the market closed.

As earnings season began for technology companies this week, Intel Corp., the largest maker of the chips at the heart of personal computers, also reported a decline in quarterly profit Tuesday. But signs that Intel’s price war with rival Advanced Micro Devices Inc. was abating pleased investors.


At Sunnyvale, Calif.-based Yahoo, Chief Executive Terry Semel said he was dissatisfied with his company’s financial performance and pledged “laser focus” on three priorities.

He said the company would close the profitability gap in search-based advertising, extend its advantage in graphical ads and “seize the lead” in social networking, video and mobile content.

Although Yahoo still claims to own the most-visited site on the Web and remains the leader in e-mail and other Internet activities, the company is being squeezed by faster growth elsewhere.

Yahoo’s strongest suit has been in display ads. But rapidly growing sites such as social networking gathering place MySpace and video clearinghouse YouTube have larger inventories of ad space to offer, and they are attracting more established brands than in the past.


Yahoo’s predicament is worse now that those sites have been acquired by powerhouses News Corp. and Google, respectively.

“New and emerging inventories have been getting more acceptance by the advertisers, and Yahoo may have been too slow to react,” Piper Jaffray & Co. analyst Safa Rashtchy said.

Yahoo said its growth in the total number of pages viewed had slowed from the previous quarter and that the money it was able to extract from each of those views had declined.

The loss in momentum in video is especially painful given Yahoo’s emphasis on entertainment, news and other content since Semel took charge in 2001.


In an interview Tuesday, Semel said Yahoo would continue with its broad approach, adding video until it was just as widespread as text.

“We’re making a lot of deals,” he said. “We have all the tools to do better.”

Semel also faulted media darling YouTube, and by extension Google, for wading into what may prove to be a legal nightmare.

“It’s not just that a lot of the content is copyrighted,” he said of YouTube. “A lot of this content is touching on many different people’s copyrights all at the same time.”


Yahoo said third-quarter profit fell 38% to $159 million, or 11 cents a share, from $254 million, or 17 cents, a year earlier, when stock options weren’t counted as an expense under accounting rules. Sales rose 19% to $1.58 billion, as had been projected last month.

Yahoo said it expected fourth-quarter sales after fees to partner sites to come in at $1.15 billion to $1.26 billion, up just 13% from the year before. Analysts had been forecasting average sales after fees of $1.3 billion.

Yahoo also announced a $3-billion stock repurchase plan over the next five years.

At Intel, third-quarter profit dropped 35% to $1.3 billion, or 22 cents a share, from $2 billion, or 32 cents, a year earlier.


Sales fell 12% to $8.7 billion as the company cut prices to regain market share lost to Advanced Micro Devices.

Chief Executive Paul Otellini told analysts that Intel regained market share in the third quarter. The company said that prices were improving and that demand this quarter had been holding up.

The Santa Clara, Calif.-based company saw the strongest sales growth in chips for servers that power business networks. Sunnyvale, Calif.-based AMD has made its biggest inroads in this market.

In the third quarter, Intel began shipping the world’s first “quad-core” processor chips. The shipments are months ahead of those expected from AMD.


The new Core 2 Duo models may help revive Intel’s sales during the holiday shopping season, analysts said.

Intel’s profit still beat expectations and its shares rose 1% in after-hours trading. They fell 71 cents to $20.90 during the regular session.

The shares of both Intel and Yahoo remain down substantially for the year to date.




Times wire services were used in compiling this report.