Yahoo sees drop in profits

Yahoo saw a drop in net profit for the first quarter from a year ago, but met its revenue guidance as its new online advertising system started to gain steam.

The internet search and media company reported that its first-quarter net income dropped 11 percent to $142m, or 10 cents a share, from $160m, or 11 cents a share, a year earlier.

The figure fell short of Wall Street expectations of 11 cents a share, prompting the share price to drop more than eight percent in after-hours trading.

Revenue rose nine percent to $1.18bn from $1.09bn a year ago, excluding traffic-acquisition costs, which are fees paid to content partners. Analysts polled by Thomson Financial were expecting revenue of $1.21bn. Yahoo's own forecast was for revenue to be between $1.12bn and $1.23bn, excluding fees shared with partners.

Net earnings, including certain costs, were $234m, or 17 cents a share, up from $233m, or 16 cents a share, a year earlier.

Yahoo forecasted second-quarter revenue would be $1.2bn to $1.3bn, excluding traffic-acquisition costs. The average analyst forecast from Thomson Financial was $1.28bn.

Search advertising sales from the company's new search advertising platform, Panama, are expected to boost revenue in coming quarters, chief financial officer Susan Decker said in an interview.

"We are very pleased with the initial progress of Panama," she said. Revenue per click, which reflects how much advertisers are willing to pay for the keywords associated with the ads, did not decline as much as was expected, she added.

The search company launched Panama in its final form in February, after a delay in releasing the initial version last year. It borrows some features from Google's ad auction system, which propelled Google to $10.6bn in revenue last year.

Yahoo offered Panama to key Japanese customers this week and will roll it out in other international markets in coming months, chief executive Terry Semel said during a conference call with analysts.

"We are executing aggressively against our strategy to connect advertisers with their target customers... and to offer the most effective integrated solutions across all formats," he said. He predicted that Yahoo's growth this year will be consistent with the US display advertising market, in which Yahoo is the leader. "Longer term, we intend to outpace the growth of the market," he added.

Scott Devitt, an analyst at Stifel Nicolaus, said shareholders in after-hours were readjusting their expectations and reacting to the fact that Panama did not accelerate, and display ads and Yahoo's business from fees decelerated.

"Expectations for Panama increased throughout the quarter," he said. "The fact that the company didn't produce any upside, except for revenue — that's the rationale for the stock [drop] in after-hours."

A second analyst noted that Yahoo reported "disappointing expense numbers" in the quarter and said the guidance was "less than impressive".

"Some may think that the underwhelming performance of Yahoo in the quarter, accompanied by higher costs, higher stock-based (compensation) and a virtually invisible CEO on the (conference) call could be a sign of a change at the top in the near term. We tend to agree with this idea," Brian Bolan, an analyst at Jackson Securities, wrote in a research note issued late on Tuesday.

Semel announced that the company was expanding a strategic relationship with eBay in releasing a new feature in search, Yahoo PayPal Checkout, that provides a blue shopping cart icon next to search results when a merchant accepts PayPal Express Checkout. The feature is an obvious rival to the Google Checkout payment processing system.

The chief executive also said Yahoo had reached an exclusive multi-year agreement to provide sponsored search and web search results to United Online's internet access services operating under the brand names NetZero, Juno and BlueLight.

Yahoo remains the most-visited site online, Semel said.

Yahoo's share of the US search market is just over 27 percent, while Google has nearly 50 percent share, according to comScore figures for March.

Yahoo shares closed at $32.09, up about 1.5 percent, on Tuesday.