Yahoo turnaround effort wavers in 2Q as revenue growth disappoints amid big earnings increase

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Yahoo 2Q earnings climb 51 pct, but revenue modest

SAN FRANCISCO — Yahoo Inc.’s turnaround effort wavered in the second quarter as the Internet company’s lackluster revenue growth overshadowed a surge in net income.

The results released Tuesday could cause some investors to doubt the strategy of Yahoo’s no-nonsense CEO, Carol Bartz, who was hired 18 months ago to lead the company out of a prolonged financial funk that has depressed its stock.

Bartz has been able to boost Yahoo’s earnings by cutting costs, but so far hasn’t been able to produce dramatic revenue gains.

Yahoo’s second-quarter revenue growth of 2 percent was particularly disappointing, given that Google Inc. last week announced its revenue surged 24 percent in the same period. Both Google and Yahoo make virtually all of their money from online advertising, a sector that has been recovering from the Great Recession more quickly than other forms of marketing.

The challenges facing Yahoo are similar to those at many other companies that have been fattening their bottom lines by trimming expenses while revenue remains lean.

“We still have plenty of work to do,” Tim Morse, Yahoo’s chief financial officer, said in a Tuesday interview.

He said the second quarter looked fairly strong until June when several large advertisers suddenly reduced their spending. “That has made us incrementally more cautious,” Morse said.

Reflecting that circumspect mood, Yahoo predicted its third-quarter revenue would either remain unchanged from last year or increase by as much as 4 percent.

Yahoo shares shed 95 cents, or 6.3 percent, in extended trading after finishing the regular session at $15.20, up 10 cents.

The company earned $213 million, or 15 cents per share, in the three months ending in June. That represented a 51 percent increase from net income of $141 million, or 10 cents per share, at the same time last year.

The earnings were a penny above the average estimate among analysts polled by Thomson Reuters.

Revenue for the period edged up 2 percent to $1.6 billion, from $1.57 billion.

After subtracting commissions paid to its ad partners, Yahoo’s revenue totaled $1.13 billion — about $30 million below analyst estimates.

Yahoo would have fared slightly better if it hadn’t been for the strengthening U.S. dollar as investors fretted about the European debt crisis. The changes in currency rates translated into fewer dollars from overseas advertising compared with a year ago.

About 29 percent Yahoo’s revenue comes from outside the United States, with Europe accounting for less than 9 percent of the total. That left the company less exposed to the currency squeeze than Google, which gets most of its revenue overseas.

Even so, Google’s second-quarter earnings were eight times higher than Yahoo’s.

Yahoo biggest weakness remains the lucrative search advertising market, where it has been losing so much ground to Google in recent years that it has forged a partnership with Microsoft Corp. in hopes of narrowing the gap.

Microsoft, which makes most its money from selling computer software instead of Internet ads, is scheduled to release its latest quarterly results Thursday.

Although recent market data indicate Yahoo’s search share has stabilized, it still isn’t selling as many ads alongside search results. The company’s search advertising revenue fell 8 percent in the second quarter to $331 million.

Yahoo sales of the online billboards known as display advertising is going much better. Revenue in this segment rose 19 percent from last year to $468 million.

Even with its recent progress, Yahoo still isn’t doing as well as it was before recession throttled marketing budgets and advertisers began shifting more of their spending to hipper Internet hangouts such as Facebook. Yahoo’s second-quarter revenue was nearly $200 million higher two years ago.

Bartz is trying to bring advertisers back by giving people more reasons to stay on Yahoo for longer periods of time. The company is now focused on presenting the Web’s most comprehensive package of news, sports, entertainment and finance coverage while also providing tools that enable people to view their individual accounts on Facebook and Twitter.

At the same time, Yahoo is saving money by hiring Microsoft to power its search engine and technology for showing ads alongside the results. The company also whittled about 100 jobs from its payroll in the quarter, leaving it with 14,100 employees at the end of June.