October 17, 2007 / 12:27 AM / 12 years ago

Yahoo beats Wall St forecasts, dulling criticisms

SAN FRANCISCO (Reuters) - Yahoo Inc YHOO.O posted quarterly results showing a rebound in brand advertising and beating Wall Street forecasts, and gave a more optimistic outlook that drove up its shares nearly 10 percent on Tuesday.

Women walk past Yahoo office in Santa Monica, California, October 3, 2007. Yahoo Inc posted a slight drop in quarterly net profits on Tuesday due to weak spending from corporate advertisers, while investors waited for a signal on the company's next moves after a 100-day strategic review. REUTERS/Lucy Nicholson

Net profit for the third quarter was slightly lower than the same quarter a year earlier but revenue far exceeded Wall Street’s muted expectations.

The results buy more time for Yahoo’s recently elevated management team to demonstrate progress in the face of harsh criticism calling for it to slash poorly performing business or sell the company outright.

“Yahoo is clawing its way back,” Jeffries & Co analyst Youssef Squali said of the results. He recommends investors buy the stock, which he says could reach $34 over time.

Shares of Yahoo closed down 4.2 percent at $26.69 on Nasdaq. But they jumped 9.3 percent following the report to trade at $29.18 in after-hours action.

Gross revenue rose 12 percent to $1.77 billion. Excluding payments to advertising partners, revenue rose 14 percent. Sales on its own site grew 24 percent, powering results, while efforts by the company to curtail low-quality ads among network affiliates hurt revenue growth on non-Yahoo properties.

“It looks like they’ve beaten expectations but not by very much,” said Sanford C. Bernstein analyst Jeffrey Lindsay. “Really, it’s still only 12 to 14 percent growth, which sounds good, but for an Internet company is really quite poor.”

Underscoring the challenges it faces is that revenue at crosstown rival Google Inc (GOOG.O) is growing four to five times faster than Sunnyvale, California-based Yahoo’s.

President Susan Decker said Yahoo has seen an acceleration of corporate display advertising to a nearly 20 percent growth rate during the third quarter after nearly five quarters of decelerating growth. Yahoo is the largest display ad provider.

Chief Executive Jerry Yang said Yahoo’s strategy over the next several years is to focus on being the starting point for the largest number of consumers in areas such as online finance, sports and news and the must-be location for advertisers and developers of the latest Web services.

“We recognize that we still have considerable work to do and I believe our new strategy puts us on the right path,” Yang said.

REBOUND BUYS TIME

Yahoo said third-quarter net profit fell slightly to $151 million, or 11 cents per share, from $158.5 million, or 11 cents per share, in the year-ago period when the company had significantly more shares outstanding.

Analysts had braced for lower profits, with a consensus forecast for net profit of $113.8 million, or 8 cents per share, according to Reuters Estimates. They had expected revenue, excluding traffic acquisition costs, of $1.24 billion.

Wall Street has been calling on Yahoo to consider more drastic moves for its businesses after a string of earnings disappointments stretching back to early 2006.

The company said in July it would conduct a 100-day review of its businesses, and many analysts and investors were looking to the company’s conference call later on Tuesday for details.

Goldman Sachs analyst Anthony Noto said that many uncertainties remain for Yahoo. He questioned whether the revenue acceleration can be sustained and what investments the company must make next year to keep consumers coming back.

Meanwhile, a key broadband contract with AT&T Inc (T.N) that drives customers to Yahoo is set to expire next year. And profitability could be hurt as it relies less on certain affiliated Web sites, Noto cautioned in a note to investors.

“The results and outlook do not provide incremental visibility into 2008, which at this point is the key to the investment decision,” Noto wrote following the results. He is neutral on Yahoo relative to other Internet sector stocks.

Yahoo said full-year results were expected to land at the upper end of Wall Street expectations, with revenue, excluding payments to affiliates, of $5.02 billion to $5.16 billion. That is at the higher end of recent Wall Street forecasts.

As of Tuesday’s closing price, Yahoo shares were 20 percent ahead of 2-1/2 year lows set in August as Wall Street is betting on bold moves by Yang to shake up its strategy and close in on Google.

Critics such as Sanford C. Bernstein’s Lindsay have recommended Yahoo exit the Web search market and hire Google to handle it, cutting as much as 25 percent of its work force or even selling the company to the likes of Microsoft Corp (MSFT.O) or eBay Inc (EBAY.O).

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