Yahoo reported second-quarter earnings of $213 million, soaring 51% from $141 million a year earlier. However, revenues came in below expectations, hurt by one week slowdown in June, it said... Really?
Second-quarter net profit amounted to 15 cents per share, up from 10 cents a year ago, and one cent above Wall Street analysts EPS forecast of 14 cents. Revenues for the company stood at $1.60 billion in the quarter, a soft 2% increase from $1.57 billion during the same period a year ago. However, the baseline (i.e. revenues excluding commissions paid to ad partners) in the end came in at $1.128 billion, compared to $1.14 billion last year, falling short of the $1.16 billion average forecast by analysts polled by Bloomberg. Total traffic acquisition costs rose to $473 million in the quarter from $436 in the second quarter of 2009.
Culprit: Second Week Of June Ad Activity
Explaining the revenue softness, CEO Carol Bartz said during the company's conference call the online ad market had not slowed down but Yahoo had specifically suffered from a shortfall in the second week of June during which advertisers turned away from the platform. "The second week of June we saw demand slow down as advertisers pulled back," Paid Content quoted Bartz as saying. However, she gave no details as to why 1) advertisers shunned away and 2) that week in particular.
Looking at their news at the time, it was that week that the company announced stepping up its social and content strategy with a Facebook deal. It was also just two weeks after it said it had bought Associated Content for a reported $100 Million and just one week before comScore reported that Yahoo and Microsoft's shares of the U.S. search market had grown fastest in May. So maybe was it linked to the publication of Experian Hitwise's mid-May report, announcing that Yahoo's market share in U.S. search had lost ground during the month of April?
Chief Financial Officer Tim Morse was quoted by Bloomberg as saying that the company's revenues had also suffered from currency fluctuations. Read: multinational advertisers may have had to revise their ad spending as the foreign exchange fluctuations were negatively impacting their budgets. If this was the case, other competitors would have been hit too. But Google, who reported its second-quarter earnings just last week, did not show any such signs.
However, both executives noted that the July figures showed the downward trend is over and Yahoo is back to normal business levels as far as online display ads are concerned.
Looking at segmented sales figures, the Americas is still Yahoo's primary market with $1.13 billion in revenues, followed by the Asia Pacific region at $327 million and EMEA at $140 million. The spread is consistent with Yahoo's expansion strategy in Asia, as illustrated by their Nokia deal and Koprol acquisition back in May. Bartz had declared then that Yahoo was "seeding the next generation of Yahoo users" in emerging markets.
The company said the "Search Agreement" sealing the Search Alliance with Microsoft was neutral to its earnings report and should remain so in the upcoming quarters, "quarterly transition cost reimbursements are expected to continue to be roughly equivalent to quarterly transition costs." Yahoo said it expects third-quarter revenues of $1.570 billion to $1.650 billion, with operating income at $160 million to $200 million.
Enter, Content Provider; Exit, Search Engine?
As Yahoo and Microsoft move forward on the Search Alliance, with Yahoo thereby 'outsourcing' its search activities to Bing, what will drive the Sunnyvale, CA-company's revenues in the future? Display ads likely so but how will marketers view a service that shifting towards being a content provider rather than a paid search platform? How much of its revenue will Yahoo part with by passing on search to Bing? How is the agreement structured? In the end, this is what really matters.