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First-Quarter Revenue Up 34% at Yahoo, but Profit Falls 22%

By Elise Ackerman
Published: April 19, 2006

Yahoo quelled investor worries that it was losing market share and momentum, reporting first-quarter revenues on Tuesday that rose 34 percent from a year earlier as Internet advertising continued to grow.

Profit, however, slumped 22 percent, reflecting higher costs, particularly for employee stock grants.

The results cheered investors who had been worried about reports by market-research firms that Yahoo was steadily losing ground to Google, the leader in Internet search.
Following the earnings announcement, Yahoo’s shares surged $1.92 a share, or more than 6 percent, in after-hours trading to $33.22 a share. In regular trading, Yahoo had closed at $31.30, down 28 percent from a high in early January.

Google, which will report financial results Thursday, rose nearly 3 percent in after-hours trading after falling 0.6 percent during the day.

In a conference call with investors, Yahoo Chief Financial Officer Susan Decker said the number of searches in the quarter had grown 15 to 20 percent compared with the previous year. She noted that Yahoo’s advertising revenue associated with each U.S. search was up 5 to 10 percent.

Overall, Yahoo’s revenues increased to $1.57 billion, up from $1.17 billion a year earlier.
Net income dropped to $160 million or 11 cents a share, compared with $205 million, or 14 cents a share, a year earlier. The company recorded a $71 million expense for stock compensation, compared with a $6 million expense a year ago.

The results met analysts’ expectations, according to Thomson Financial.

Excluding certain marketing costs, such as commissions paid to partners who send traffic to Yahoo, net revenue was $1.09 billion.

Decker said she was expecting net revenues for the year to be $4.6 billion to $4.85 billion.

John Aiken, an analyst at Majestic Research, said Yahoo appears to be reaping the benefits of keeping users busy on its network of sites. ``One of the big trends we’ve seen is users increasingly do searches on subchannels in Yahoo,’’ Aiken said, referring to sites like Yahoo Music and Yahoo Video.

According to Nielsen//NetRatings, Yahoo’s fastest-growing property was Yahoo Entertainment, where traffic grew to 5.8 million unique visitors a month last quarter from 3.3 million a year earlier. Overall, Yahoo’s network of Web sites had an average of 105 million visitors a month.

While the Sunnyvale company is the most visited U.S. Internet destination, it lags Google in online search queries. According to comScore Networks, a Chicago-based consumer research firm, Yahoo’s share of all U.S. searches dropped from 30.6 percent in March 2005 to 28 percent in March 2006. Google’s share rose from 36.4 percent to 42.7 percent in the same period.

In an interview, Chief Operating Officer Dan Rosensweig said third-party reports on the market share of search engines ``have been very inaccurate and caused confusion.’’ Rosensweig said Yahoo’s market share varies from country to country and that ``we feel that we’ve been holding our own.’’

CEO Terry Semel told investors he was optimistic about the company’s prospects. ``More and more marketers are coming to understand that the Internet can really meet their needs across the full marketing spectrum,’’ he said.

Semel said Yahoo will be rolling out a new way for businesses to advertise on Yahoo that fine-tunes the way paid listings are ranked. ``We believe we are in the best position to work with marketers to deliver the right message in the right format to the right customer at the right time,’’ Semel said.