Yahoo profit down, outlook intact; CEO set to stay

By Eric Auchard

SAN FRANCISCO (Reuters) - Yahoo Inc's net profit fell 19 percent but investors took heart that it did not change its outlook despite a weakening U.S. economy and the distraction of Microsoft Corp's failed takeover bid.

Shares of the Internet company, which just settled a proxy battle with activist investor Carl Icahn, rose 2.7 percent to $21.99 in extended trade following the quarterly report.

"Investors braced for the worst," said Jeffrey Lindsay, analyst at Sanford Bernstein. "... these results are poor, but relative to what people were expecting, they're not so bad."

Chief Financial Officer Blake Jorgensen said Yahoo was not changing its financial view for 2008, even though a difficult economic environment is weighing on online advertising.

"We are pretty pleased (with results), relative to both the distractions and the economy," he said in an interview.

Yahoo executives made no secret that the quarter included unusual headaches, particularly the back-and-forth with Microsoft. Chief Executive Jerry Yang referred to the battle as "extraordinary," but said he was committed to staying as CEO. President Sue Decker called the takeover fight a "swirl."

Despite the distractions of Icahn and Microsoft, Yang said his company intended to keep looking at possible transactions. Since January, Yahoo has faced an unsolicited takeover bid from Microsoft, but talks between the two tech giants have cooled.

"We have looked at just about every alternative you could imagine as far as looking at how do we best position the company to go forward either through transactions and/or financial options," Yang said on a conference call.

Second-quarter net income fell to $131 million, or 9 cents per diluted share, from $161 million, or 11 cents per share, a year earlier. Wall Street was looking for 10 cents a share, according to Reuters Estimates.

Net revenue excluding payments to affiliated Web sites that carry Yahoo ad services rose 8 percent to $1.35 billion. Analysts, on average, had expected $1.37 billion.

One negative factor was this year's unwinding of Yahoo's highly lucrative joint venture with AT&T to sell broadband Internet access, said Canaccord Adams analyst Colin Gillis.

The deal had added about $40 million in gross profit to the second quarter of 2007, he said, calling it "margin honey" for Yahoo's bottom line. "It's regrettable that AT&T revenue loss masks the gains in search and display advertising," he added.

WEAK AD SPENDING ON CONSUMER GOODS

The headline in the latest issue of Advertising Age warned marketers this week: "Advertisers Ready for Age of Austerity."

Yahoo said that as advertisers respond to economic woes, a shift is occurring away from brand marketing campaigns on big online portals -- banner ads in the simplest sense -- to performance-based ads running on sites across the Web.