Yahoo Revenue Falls Short of Analysts' Estimates on Ad Sales

Yahoo! Inc., owner of the second- most popular U.S. Internet search engine, reported sales that missed analysts’ estimates as marketers devoted online search-ad spending to rival sites. The shares fell in late trading.

Excluding revenue passed on to partner sites, Yahoo had sales of $1.13 billion, the Sunnyvale, California-based company said today in a statement. That compares with the average estimate of $1.16 billion among analysts surveyed by Bloomberg.

Yahoo is grappling with competition from companies such as Google Inc. and Facebook Inc., which have benefited from increases in market share and user growth. While Yahoo posted gains in display advertising, its sales from ads that appear next to search results dropped in the quarter.

“Their search business is losing share and is in decline,” said Jason Helfstein, an analyst at Oppenheimer & Co. in New York, who rates the shares “market perform” and doesn’t own any. “They’re not cutting enough costs to offset that.”

Yahoo fell 6.2 percent to $14.26 in extended trading, after rising 10 cents to $15.20 today on the Nasdaq Stock Market. The shares have dropped 9.4 percent this year.

Search ad sales didn’t meet expectations, Chief Financial Officer Tim Morse said in a telephone interview. The company experienced a “pullback” with customers in June, though that has reversed this month, he said.

“Revenue fell a little bit short for us, so plenty of work still to do,” Morse said. Currency fluctuations also hurt sales, he said.

Revenue Forecast

The company joins International Business Machines Corp. and Texas Instruments Inc. in falling short of analysts’ sales estimates last quarter.

Yahoo forecast revenue of $1.57 billion to $1.65 billion for the current quarter, compared with the $1.64 billion estimate of Aaron Kessler, an analyst at ThinkEquity LLC in San Francisco.

In the second quarter, search-based ad sales declined 8 percent from a year earlier, after a 14 percent slide in the January-March period. Display ad revenue, including banner ads, rose 19 percent in the second quarter.

U.S. online advertising is rebounding. The market should expand 11 percent this year after declining 3.4 percent last year, according to EMarketer Inc. in New York. Last week, Google reported a 24 percent increase in second-quarter profit, which is derived mostly from online ads.

‘Not Happening’

Yahoo is bringing new content to its site to attract visitors and keep pace with rivals. The company’s U.S. user base rose 10 percent in June from a year earlier, a smaller increase than Google’s 14 percent and Facebook’s 84 percent, according to ComScore Inc. in Reston, Virginia.

Visitor are also spending less time on the site. They logged on for 2 hours and 11 minutes in June, down from 2 hours and 56 minutes in December, according to Nielsen Co. in New York.

“What they need are people staying up late, spending time on Yahoo,” said Heath Terry, an analyst at FBR Capital Markets Corp. in New York, who rates Yahoo shares “underperform.” “From all the numbers that we see, that’s just not happening.”

Second-quarter net income attributable to Yahoo rose to $213.3 million, or 15 cents a share, from $141.4 million, or 10 cents, a year earlier.

In May, Yahoo said it would feature social games on its home page from Zynga Game Network Inc., including “FarmVille” and “Mafia Wars.” Zynga has more than 235 million active users.

Yahoo also has a deal with Facebook, owner of the world’s largest social-networking service, to integrate more content on Yahoo’s sites.

Search Transition

Yahoo is investing in its own properties, using savings from its efforts to cut expenses. The company is offloading the costs of running a search engine through a 10-year agreement with Microsoft Corp. Yahoo will use Microsoft’s Bing search product on its sites and sell ads next to the results.

The search transition is progressing well and the companies still aim to have it completed before the holiday shopping season, Yahoo Chief Executive Officer Carol Bartz said on a conference call. Yahoo has begun testing the new search services, both for consumers and advertisers, she said.

The companies aim to use the partnership to compete with industry leader Google, which had more than triple Yahoo’s U.S. market share of online searches last month, according to ComScore. Microsoft was third.

To contact the reporter on this story: Brian Womack in San Francisco at Bwomack1@bloomberg.net

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