Yahoo Profit Droops Despite Revenue Rise

Yahoo reported financial results for the second quarter of 2007 Tuesday, bringing the company a rise in revenue over the same quarter of last year as well as a significant drop in profit.

Overall revenues rose 8 percent for the quarter, up to US$1.7 billion, while marketing services revenues rose $1.49 billion, a 7 percent increase. Net income, on the other hand, dipped to $161 million, compared to $164 million for the same period in 2006.

“I am focused on doing everything we need to do to strengthen our business, capture long-term growth opportunities and create increased value for our shareholders,” said Jerry Yang, cofounder and chief executive officer of Yahoo. “By sharpening our focus, speeding execution, building our technology and talent and investing in key growth areas, we can put Yahoo on a clear path to fulfill its potential as an Internet leader.”

Yang replaced Terry Semel as CEO in June. While it may be too early to see clear results from Yang’s leadership, he’ll be under the gun to produce by the third quarter. Investors reacted to the news by dropping the company’s stock price 5 percent. At mid-day Wednesday, Yahoo shares traded at $26.14, down from Tuesday’s close of $27.53.

The Google Gun

Rival Google will likely capture 27.4 percent of the estimated $21.7 billion U.S. advertisers will spend online this year — a catch of $5.9 billion — according to market research company eMarketer.

While Google’s market share has ascended, eMarketer notes, Yahoo’s stake is slipping to 16.3 percent, down from a 19.4 percent market share in 2005.

“Clearly, the drop in their search revenues has hurt them in terms of revenue growth more than any single factor,” David Hallerman, senior analyst at eMarketer, told the E-Commerce Times.

To combat Google and its success with text-based search advertising, Yahoo late last year launched “Panama,” a new online advertising system. Panama was designed to increase the rate of advertising clicks by Yahoo’s users, and Yahoo said it’s starting to improve. However, any improvements were lost under drops in display advertising.

Yahoo’s Edge

“Even though Yahoo made some references to slowness in display advertising, that is going to be a strength for them to the degree that they can develop it further,” Hallerman noted.

“It’s far harder to compete on the search side than on the display side, where Yahoo is a desirable commodity from the marketer’s point of view — especially as traditional brands move to the Web,” he added.

Overall, though, Yahoo seems to face a wide variety of challenges that are hard to pinpoint.

“There’s no single or simple answer. Yahoo has been confronted with a number of challenges,” Greg Sterling, analyst and founder of Sterling Market Intelligence, told the E-Commerce Times. “There are internal organizational and cultural challenges they are trying to address, and there’s competitive pressures.”

Simply an Age Factor?

“Yahoo is a more mature organization than Google in terms of its age,” Sterling said. “It’s been around longer, and it’s slower. This is what happens. It’s sort of the nimble startup gives way to the more bureaucratic organization structure as it grows and ages. Obviously this will happen to Google, too, given how it’s grown over the last few years.”

Yahoo is a more sprawling organization, Sterling added, with more politics and a heavy layer of middle-management stake holders. There are reporting structures that “aren’t as clean as they should be,” he commented. The company has also been fighting complacency and a hesitation to act, he added.

Sense of Urgency

“Over the last several months, we have made considerable progress driving much tighter focus within our core operations to drive growth. This will take time and continued investment, but we are operating with a great sense of urgency,” said Susan Decker, president of Yahoo.

“In order to create meaningful value for shareholders and to drive growth in the future, we will aggressively look at all opportunities to allocate our capital and talent in the most effective ways,” she added.