Yahoo!'s woes compound with muted Q2 results - Update 2

(RTTNews) - Internet information provider Yahoo! Inc. (YHOO | Quote | Chart | News | PowerRating), which is struggling to put up a brave show amidst the takeover threat from the software giant Microsoft Corp. (MSFT | Quote | Chart | News | PowerRating), weak online ad market and a fall in its search engine market share, announced, after the bell on Tuesday, an 18.6% drop in its net income for the second quarter hurt by higher cost of revenues. The company's earnings and revenues, excluding traffic acquisition costs or TAC, fell short of Street expectations. The company also reduced its income from operations outlook for the full year 2008.

The results of the number two search engine comes a day after it struck a deal with billionaire investor Carl Icahn to settle a proxy battle, under which Icahn will join the company's board of directors along with two of his nominees. The deal, which came after two months of bickering, was aimed at averting a show down at its August 1 shareholders meeting, but the timing of the pact seems to suggest that Yahoo! anticipated that its second quarter results might miss expectations.

On July 17, market leader and search engine giant Google (GOOG | Quote | Chart | News | PowerRating) delivered lower than expected earnings for the second quarter, raising concern over the impact of the slowing U.S. economy on its ad sales.

The muted results from Yahoo! would continue to be an embarrassing situation to put up a strong fight against the hostile take over bid by Microsoft-Carl Icahn combine. The Internet company has been rejecting a bid from Microsoft ever since the latter offered to buy the struggling company for $31 a share that was later sweetened to $33 a share. But, Yahoo!'s co-founder and chief executive officer Jerry Yang demanded $37 a share leading the software joint to end its negotiations abruptly.

Most recently, the number two search engine company rejected another offer from Microsoft and Icahn that involved splitting the company, with Microsoft taking over the search engine operations of Yahoo! and Icahn taking over the rest of the company. Yahoo! termed that its existing business plus its recently signed commercial deal with Google had superior financial value and less complexity and risk than the Microsoft/Icahn proposal.

Observers believe that July 21 agreement with Icahn, who is holding 5% stake, was not only aimed at averting a trial of strength at its shareholders meeting on August 1, but also prevent the billionaire from launching a broadside against Yahoo! for its results and tone down his attack on the company's top executives. The company's board might have a got a breather before coming up with fresh strategy to face Microsoft's continued takeover threat.

Yahoo! also lost a significant market share during the last one year. Compared to June 2007 search engine market share of 25.1%, the company's June 2008 market share was 20.9%. On the other hand, Google's market share in June 2008 stood at 61.5%, significantly up from 49.5% in June last year. On a month over month, Yahoo!'s search engine gained 30 basis points from 20.6%, whereas Google shed 30 basis points from 61.8% in the same period. Similarly, Microsoft's year-over-year June search engine market share dropped to 9.2% from 13.2%.

Second Quarter Results

The Sunnyvale, California-based Yahoo! reported net income of $131 million or $0.09 per share, down from $161 million or $0.11 per share in the same quarter last year. Excluding charges, net income would have been $139 million or $0.10 per share, still lower than $163 million or $0.12 per share in the year-ago quarter. On average, 23 analysts polled by First Call/Thomson Financial predicted the company to report earnings of $0.12 per share.

Sequentially, net income and adjusted net income dropped from $542 million or $0.37 per share and $150 million or $0.11 per share respectively recorded in the first quarter of 2008.

Revenues for the most recent quarter grew 6% to $1.798 billion from $1.698 billion and revenues, excluding TAC, rose 8% to $1.346 billion from $1.244 billion in the previous year quarter. Twenty-six Wall Street analysts had a consensus revenue projection of $1.37 billion.

Sequentially, gross revenues slackened from $1.818 billion and excluding TAC, revenues fell from $1.352 billion reported in the first quarter of 2008.

Yahoo!'s arch rival, market leader and search engine giant Google last Thursday reported net income, on a GAAP basis, of $1.25 billion or $3.92 per share for the second quarter, up from $0.93 billion or $2.93 per share in the same quarter last year. The results included $273 million towards stock-based compensation costs compared to $242 million in the corresponding period last year. Excluding charges, net income would have been $1.47 billion or $4.63 per share, higher than $1.0 billion or $3.18 per share in the year-ago quarter.

Gross revenues climbed 39% to $5.37 billion from $3.87 billion, while revenues, excluding Traffic Acquisition Costs or TAC, jumped 43.4% to $3.9 billion from $2.72 billion in the previous year quarter.

Yahoo! said that its Marketing Services accounted for revenues of $1.587 billion, up 7% from $1.486 billion. Of this, marketing services revenues from owned and operating sites increased 14% to $1.016 billion from $892 million, while revenues from affiliate sites slipped 4% to $571 million from $594 million in the comparable 2007 period. Fees revenues slackened 1% to $211 million from $212 million in the corresponding period last year.

Commenting on the results, the company's chief executive officer Jerry Yang said, "Yahoo! is executing against its strategy, and we believe is well positioned for long-term growth and maximizing stockholder value. Yahoo! saw benefits in the second quarter from a number of the strategic initiatives that we have been delivering against, including the roll out of innovations in search and the announcement of a number of important partnerships. We are seeing validation that we have the right strategy as we continue to make transformational investments that position us to take advantage of pivotal trends driving growth on the Internet."

Segment Results

Revenue from the U.S. division grew 13% to $1.265 billion from $1.119 billion, while revenue from international segment slipped 8% to $534 million from $579 million in the comparable 2007 period.

Yahoo! disclosed that the U.S. unit's operating income before depreciation, amortization and stock-based charges witnessed an 18% downturn to $298 million from $362 million, whereas international segment operating income before depreciation, amortization and stock-based charges increased 16% to $129 million from $111 million in the corresponding period last year.

Cash Flow

The company stated that its free cash flow was $231million, down from $328 million in the second quarter of 2007. Yahoo! stated that it could generate $191 million from the fresh issue of common stock as a result of the exercise of employee stock options. The company added that about $14 million were used for acquisitions and $42 million to buy intellectual property rights. Yahoo! closed the second quarter with cash, cash equivalents and investments in marketable debt securities of $3.219 billion, up from $2.848 billion in the first quarter.

Other Metrics

The company's cost of revenues increased 12.1% to $765.91 million from $683.01, while gross profit rose 1.8% to $1.032 billion from $1.014 billion in the year-ago quarter.

Total operating expenses increased 12.3% to $931.65 million from $829.95 million in the same quarter last year. Of this, sales and marketing expenses accounted for $404.9 million, up from $390.43 million and general and administrative costs were $188.81 million compared to $133.26 million in the corresponding 2007 period. Product development costs grew to $314.72 million from $281.09 million in the preceding year quarter. This resulted in income from operations dropping 45.7% to $100.52 million from $184.95 million in the year earlier quarter.

The company indicated that its operating income was impacted by an incremental costs of $22 million for outside advisors in connection with Microsoft's unsolicited proposal, other strategic alternatives and related litigation defense expenses.

Expectations

Moving ahead, for the third quarter of 2008, Yahoo! expects revenues of $1.78 - $1.98 billion for a income from operations of $65 - $85 million. Twenty-one Wall Street analysts are looking for revenues of $1.4 billion.

For the full year 2008, the company tightened its gross revenue forecast to $7.35-$7.85 billion from $7.2 - $8.0 billion, and cut its income from operations outlook to $525-$595 million from $595 -$705 million. While releasing fourth quarter results, Yahoo! estimated revenues, excluding TAC, of $5.35 - $5.95 billion for the same period. Thirty Street analysts have a consensus revenue projection of $5.72 billion.

Stock Movement

Shares of Yahoo! closed down by $0.27 or 1.25% at $21.40 in Tuesday's regular trading session. The stock hit a yearly high of $34.08 and a low of $18.58. In the extended hours trading, the stock is trading up by $0.40 or 1.87% at $21.80.

For comments and feedback: contact editorial@rttnews.com Copyright(c) 2008 RealTimeTraders.com, Inc. All Rights Reserved

More News:   Market Updates | Stock Alerts | All Trading News | Stock Index