Yahoo's revenue and profit slid significantly in the first quarter, but the company's performance was in line with Wall Street's expectations and company officials said the results reflect solid execution toward its financial goals.
During the quarter ended March 31, revenue came in at $1.21 billion (£740 million), down 24 percent compared with 2010's first quarter. Yahoo said the revenue drop is in part due to a change in how it recognises the part of its revenue derived from its search advertising agreement with Microsoft. That revenue isn't reported as gross revenue, but rather as part of the net revenue left after subtracting commissions paid to advertising and other partners.
Yahoo's net revenue was $1.06 billion, down 6 percent year on year but matching the consensus estimate from analysts polled by Thomson Financial. Meanwhile, net income fell 28 percent to $223 million, while earnings per share dropped 23 percent to $0.17 per share, exceeding analysts' consensus estimate by one penny.
"We continue to make headway on our plan to increase profitability and grow revenue. We're executing and innovating faster," Yahoo CEO Carol Bartz said during a webcast to discuss the quarter's results.
Yahoo's net display advertising revenue grew 10 percent to $471 million, but net search advertising revenue shrunk 19 percent to $440 million. "For search, Q1 was a mixed bag," Bartz said. Without providing specific details, Bartz said that the revenue per search (RPS) generated by the combined Yahoo-Microsoft search ad marketplace has been below the companies' expectations.
Although customers are seeing increased return on investment, Microsoft needs to improve its AdCenter systems architecture, features and functionality, she said. "We're working very closely with Microsoft on this. They understand the issues and they're hard at work," Bartz said.
Until the RPS picks up, Yahoo will hold off on transitioning more regional markets from its search ad platform to AdCenter, she said. Yahoo had already moved the US and Canada markets to AdCenter late last year. However, Yahoo will continue to switch its back-end, algorithmic search engine functions such as web crawling, indexing and ranking, over to Microsoft.
Microsoft and Yahoo signed their 10-year search deal in mid-2009 but didn't get regulatory clearance for it until early 2010.
For the deal's first five years, Microsoft will get a 12 percent cut of paid clicks on the search sites of Yahoo and of Yahoo web publisher partners. Meanwhile, Yahoo will be in charge of selling premium, guaranteed search ads on behalf of both companies, and will handle the one-on-one relationships with the biggest advertisers, search marketing firms, resellers and their clients.
When the deal was signed, Yahoo estimated that, when fully implemented, it would boost its annual operating income by about $500 million, provide capital expenditure savings of about $200 million and increase annual operating cash flow by about $275 million.
The company's display ad business is being helped by the launch of many new content sites in a variety of countries where Yahoo had little or no presence before, thanks to a new, more flexible content management platform, Bartz said.
"We're focused on extending our lead as a premier digital media company through great content experiences and the advanced platforms that help us rapidly create and monetize them," she said.
Yahoo is also bullish on video ads, which it sees as its fastest growing format, she said.
Yahoo's forecast calls for second quarter net revenue to be in the range of $1.07 billion to $1.12 billion, and gross revenue to be in the range of $1.23 billion to $1.29 billion.