Yahoo Profit Beats Estimates

Despite its various market woes, venerable search engine Yahoo can still pull small surprises out of its hat. Its latest financial report showed some bright spots in an otherwise dismal picture for the embattled company’s future.

Demand for advertising on Yahoo’s network was stronger than expected, which enabled the company’s third-quarter profit to exceed analysts’ estimates. On average, they projected a profit before some costs of 17 cents a share, but Yahoo reported 21 cents a share. Unfortunately, the rest of the report wasn’t quite so rosy. Sales, for example, dropped more than four percent to $1.07 billion, which at least matched the average estimate.

Another bright spot in Yahoo’s financial report came in the form of a continued agreement with Microsoft. This revenue per search agreement, originally scheduled to run out in the first quarter of next year, will now run through 2013.

Overall, the stock market seemed to like Yahoo’s quarterly financial report this time around, as the company’s stock rose 4.5 percent to $16.17 after the report’s release. Over the past year, Yahoo’s stock has dropped seven percent.

The earlier drop in value in Yahoo’s stock should come as no surprise to anyone who has been following the company. It competes with Google and Facebook for both users and advertisers; in the face of those two powerhouses, it’s no wonder the company’s board is now considering a “full range” of options, according to interim CEO Tim Morse. The range of options likely includes the sale of the entire company to some other firm.

Despite the bright spots, anyone purchasing Yahoo would be buying a financially troubled firm. Its net income fell by more than a quarter to $293.3 million from its year-ago figure of $396.1 million. Yahoo did experience some growth in its Asian holdings, which enhanced its revenue, but quite possibly not enough to completely offset losses. Analysts had estimated that the company’s fourth-quarter revenue, excluding sales passed to partner sites, would be $1.21 billion. That’s at the high end of what Yahoo itself says it will be, putting that figure at between $1.13 billion and $1.24 billion.

The biggest problem is that Yahoo’s share of its bread-and-butter market – display ads and banners – is shrinking. It’s been estimated that Yahoo’s share of that market in the United States will be 13.1 percent this year, down from 14.4 percent last year. While display sales rose a little in Yahoo’s second quarter, its earnings barely changed from a year ago: $449 million this year versus $448 million a year ago.

Or perhaps it’s more accurate to say that Yahoo’s biggest problem has been that no one has been able to turn the company around. Carol Bartz, hired as CEO at Yahoo to do just that, failed after more than two and a half years of trying, and eventually lost her job over it. Many analysts do seem to realize the pit Yahoo is in, and while they appreciate the positive spots in Yahoo’s financial report, they’re not wildly rejoicing. “They hit a single here — it’s great, but it’s a single,” observed Brett Harriss, an analyst at Gabelli and Company in New York. “We’re waiting for either a CEO to come in and give us a vision of what Yahoo could be, or we’re looking for the sale of the entire company.”

Strangely, Yahoo doesn’t want for suitors, or at least rumors of suitors. These include private equity firms, Chinese e-commerce company Alibaba Group, and former News Corp. executive Peter Chernin. Even Microsoft is rumored to be interested in another bid, after Yahoo rebuffed its unsolicited buyout bid in 2009. How likely is it that any of these rumored plans will come to fruition? And if any of them do pan out, how soon will they happen? “The board is actively looking at the full range of options available to return the company to a path of robust growth and industry-leading innovation,” according to Tim Morse, Yahoo’s CFO and interim CEO. “The board also has said that when it has something to announce, it will do so. That will take time.” Guess we’ll just have to wait and see.

For more on this, check out http://www.businessweek.com/news/2011-10-19/yahoo-climbs-as-profit-beats-estimates-on-internet-ad-demand.html.

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