Unsexy Yahoo Muddles Into Disappointing Results

Yahoo shares took a hit Wednesday morning after the company reported disappointing second-quarter sales. Despite seeing profits rise, Yahoo missed analysts' estimates. 

Yahoo generated sales of $1.13 billion, excluding revenue passed on to partner sites, in the second quarter. That's a two percent gain over the second quarter of 2009. Yahoo's net income rose to $213.3 million, or 15 cents a share, from $141.4 million, or 10 cents a share, in the year-ago period.  

Yahoo profits rose 51 percent, buoyed in part by 19 percent year-over-year growth in display advertising. But search advertising dipped eight percent. The positive news didn't overcome analyst disappointment, and its stock fell as much as eight percent in pre-market trading. Analysts expected Yahoo to post second-quarter earnings of 14 cents a share on $1.16 billion net revenue. 

The Bartz Spin

"We're pleased that we continued to deliver strong operating income and margin expansion," said Yahoo CEO Carol Bartz. "Our search fundamentals are improving and we posted another quarter of healthy display advertising growth."  

Bartz has to remain optimistic in the second year of the turnaround effort she's spearheading, despite the fact that Yahoo continues to lose momentum in the search market. Yahoo's story is that it's continuing to progress toward its objectives. But Yahoo seems to be moving too slow, much like the general economy, even while Google and Apple defy the recession. 

"Yahoo is in an enormously competitive environment, especially with Facebook on the one side with display advertising and Google on the other side with its dominance in the search space," said Greg Sterling, principal analyst at Sterling Market Intelligence. "Investors were disappointed and some of the analysts were critical that it came in below the guidance." 

What Yahoo Needs To Do

Under Bartz, Yahoo appears more disciplined. The company has looked at cost-cutting measures to drive up margins. But that's not enough in an ultra-competitive Internet market. Yahoo needs to be more aggressive on the consumer side, Sterling said, growing through new properties and pushing out into mobile and other areas. 

Yahoo would argue it has done that. The company deepened its integration with Facebook through Yahoo Pulse, launched new e-mail and messenger apps for the Android and iPhone platforms, extended a global partnership with Samsung, inked a strategic alliance with Nokia and Sony, and made some acquisitions in the second quarter. But none of that has been enough to excite the market. 

"It's very challenging. I don't know what I would do exactly if I were in Carol Bartz's position. Yahoo is still is a very prominent company, but it's struggling to gain momentum even though they do still have some industry-leading properties," Sterling said. "In this post-Bing era where they are going to get this more relevant index and save all this money, they really need to deliver in terms of the user experience. So far it hasn't been interesting or sexy enough to captivate people."

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