Yahoo shares fall despite profits increase

Yahoo on Wednesday reported earnings that met Wall Street analyst expectations, thanks to continued strength in its commercial search business.

The Web giant posted a profit of $112.5m, or 8 cents per diluted share, for its fiscal second quarter, which ended 30 June. That's up from $50.8m, or 4 cents a share, in the same period last year, taking into account a 2-to-1 stock split, effective 11 May. Revenue for the quarter was $609m, excluding traffic acquisition costs (TAC), compared with $321m a year ago.

Yahoo's stock fell in after-hours trading, down 14 percent to $28 a share shortly after the company reported earnings.

Wall Street expected Yahoo to earn 8 cents per share and $610m in revenue, according to Thomson First Call's consensus of analyst estimates.

Much of the stock downturn stemmed from what Yahoo executives deemed as seasonal flatness in the commercial search business. Despite contributing significantly to Yahoo's revenue and profitability, Wall Street investors were hoping to see blowout results like last quarter.

"I believe investors have overestimated the growth in search," said Jordan Rohan, an equity analyst at Schwab Soundview Capital Markets.

The result is that the second and third fiscal quarters are expected to show slower growth, while the first and fourth could become boom periods for paid search. Still, Yahoo executives are satisfied with this quarter's numbers.

"To us, we're very happy," Yahoo chief executive Terry Semel said in an interview. "We weren't at all surprised. Pricing is stable, everything is good."

Last quarter, Yahoo earned $101m in profits, or 7 cents a share, after the stock split. Revenue for the period was $550m.

Yahoo's earnings highlight revenue numbers that do not include TAC, which excludes the fees its Overture Services subsidiary pays to search partners. Companies such as CNN and Microsoft's MSN get a cut of revenue every time customers click on Overture's paid search listings. Executives consider TAC revenue less illustrative of Yahoo's true revenue potential.

Yahoo's total revenue including TAC reached $832.2m for the quarter.

Yahoo's operating income before depreciation and amortisation -- formerly known as EBITDA -- reached $234m. Cash flow hit $250m, while free cash flow reached $194m from $71m a year ago.