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Yahoo’s Sales Forecast Misses Analysts’ Estimates

Yahoo! Inc. headquarters in Sunnyvale
A pedestrian walks outside Yahoo! Inc. headquarters in Sunnyvale, California, on Jan. 14, 2010. Photographer: Ryan Anson/Bloomberg

Yahoo! Inc., owner of the second- most popular U.S. Internet search engine, forecast sales that missed analysts’ estimates after the company lost market share.

Second-quarter revenue will be $1.6 billion to $1.68 billion, the company said today in a statement. Hamilton Faber, an analyst with Atlantic Equities LLP in London, had projected $1.69 billion.

In search, the company has lost ground to Google Inc., making its site less attractive to advertisers. Yahoo now must also compete for marketing dollars with social-networking sites, including market leader Facebook Inc. To win back share and trim expenses, Chief Executive Officer Carol Bartz is selling businesses and leaning on Microsoft Corp. to support its search service.

“Their search business is doing really poorly,” said Jason Helfstein, an analyst with Oppenheimer & Co. in New York. “They’re outsourcing the search business, so over time they’ll be able to help offset some of that search weakness with lower costs. In the interim, it still matters.”

Yahoo fell 66 cents, or 3.6 percent, to $17.72 in late trading after the report. The shares, up 9.5 percent this year, closed at $18.38 on the Nasdaq Stock Market.

Excluding revenue passed on to partner sites, sales totaled $1.13 billion last quarter. Analysts in a Bloomberg survey had projected $1.17 billion on average.

Profit Increase

While losing search market share hurt revenue, Yahoo increased the amount it makes per query compared with the previous quarter, said Tim Morse, chief financial officer. Revenue per search declined from the year-earlier period.

“Our underlying business performance is clearly improving,” he said in an interview. Yahoo’s search-engine market share also is stabilizing, Morse said.

First-quarter net income attributable to Yahoo more than doubled to $310.2 million, or 22 cents a share, from $117.6 million, or 8 cents, a year earlier. Sunnyvale, California-based Yahoo reported a 5 cent gain from the sale of its Zimbra unit, as well as 2 cents in payments from its Microsoft partnership.

Last July, Microsoft and Yahoo struck a 10-year agreement to team up against Google in the search market. Yahoo plans to use Microsoft’s Bing on its sites and sell ads next to the results.

Microsoft Payments

Yahoo should get about $75 million to $85 million in operational-cost reimbursement from the deal this quarter, Morse said during a call with analysts. The company received $35 million during the first quarter for operations costs. It also got $43 million in transition payments, Morse said.

The companies aim to complete the integration in the U.S. by the year-end holiday period, Bartz said on the call. Yahoo is seeing strong interest from advertisers and expects its search market share to climb this quarter.

“The economy continues to improve,” Bartz said. “We delivered what I call a solid quarter.”

Yahoo had 16.9 percent of the U.S. search market in March, down from 17.3 percent in December, according to Reston, Virginia-based ComScore Inc. That compares with 65.1 percent for Google. Microsoft’s Bing ranks third, with 11.7 percent.

Ad Recovery

Yahoo investors are counting on a rebounding ad market to lift the company’s fortunes. The U.S. online market will grow 13 percent this year, outpacing the 3 percent expected for total ad sales, according to Magna Global, a unit of Interpublic Group of Cos., the second-largest U.S. owner of ad agencies.

Bartz has pared back operations, eliminating some efforts to spur ad revenue that didn’t work out. Last month, Yahoo said it would shut down its Publisher Network, a service that helps small businesses and bloggers display ads on their sites. The Publisher Network, which was still in a testing phase after almost five years, competed with Google’s AdSense.

In February, Yahoo agreed to sell its HotJobs employment site to Monster Worldwide Inc. for $225 million. The previous month, Yahoo approved the sale of its Zimbra e-mail and collaboration software to VMware Inc. for an undisclosed price. Last year, Yahoo closed the Web-hosting unit GeoCities and an online storage site called Briefcase.

Even as she offloads businesses, Bartz expects to make more acquisitions this year. Last month, the company agreed to buy Citizen Sports, adding mobile and social-networking features to its sports site. Citizen Sports lets customers check live scores on smartphones.

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