Yahoo Results Disappoint

Yahoo yesterday shared third quarter results chairman and CEO Terry Semel called “unsatisfactory,” and announced several steps it hopes will lead to improvement.

While Yahoo’s performance didn’t grow as quickly as it expected when it gave guidance for the quarter earlier this year, it still saw growth. Revenue rose 19 percent year-to-year to $1.58 billion for the third quarter, with marketing services revenue accounting for $1.37 billion of that. Revenues excluding traffic acquisition costs came in at $1.12 billion, an increase of 20 percent over the same period last year, but less than the $1.14 billion Wall Street analysts expected. Net income slid 37.5 percent, to $158.5 million or $.11 per share. Not counting an $80 million stock options-related hit, the net income figure is $235 million

“While we’re very excited about a number of things happening at Yahoo, I am not satisfied with our third quarter financial performance,” Semel said on a call with investors Tuesday afternoon. “We have continued to grow our business at a pace that many companies would envy. But that’s not good enough for us. We are not exploiting our considerable strengths as well as we should be, and we are committed to do it better.”

Yahoo made headlines last month when Semel and CFO Sue Decker told investors at a Goldman Sachs conference slower growth in automotive and financial advertising on its network would impact the bottom line this quarter.

Decker said at the time the weakness would likely lead the company to report earnings toward the lower end of its guidance for the quarter. Today, Decker said Yahoo’s slowing performance was mostly due to company-specific issues within several industries, with those two cited as examples. Another factor is the amount of graphical ad inventory that’s becoming available from competitors, which Yahoo is moving to address with two acquisitions.

Yahoo made two separate investments in ad technology today to improve its offerings to advertisers. The company has acquired rich media technology provider AdInterax and invested in auction-based ad marketplace Right Media, giving Yahoo a 20 percent stake in that company. Financial terms weren’t disclosed.

AdInterax is a hosted technology provider that enables non-technical users to create rich media ads through a drag-and-drop interface. Yahoo will use the technology to offer creative assembly and campaign management tools to its advertisers at no charge. That platform is expected to be tested later this year, and rolled out in early 2007.

In addition to the stake in Right Media, Yahoo takes a seat on the Right Media Exchange. It will begin auctioning its “non-premium,” or remnant, inventory to ad networks through the Exchange. They in turn will resell it to their advertisers.

The AdInterax acquisition will help Yahoo make it easier for advertisers to take advantage of the company’s premium graphical ad inventory, while selling remnant inventory through the Right Media Exchange will provide an opportunity to better monetize non-premium space, Semel said.

One step Yahoo hopes will improve its search revenue is the launch of its new search marketing platform, code-named Project Panama. The campaign management platform went live Tuesday, and advertisers in the U.S. will be invited in stages to begin the transition. A new ranking system for ads includes ad quality, similar to the “Quality Score” incorporated into Google’s Ad Rank model. It’s on track to launch in the first quarter of 2007.

Google combines the cost-per-click bid with the ad’s click-through rate, ad text relevance, historical keyword performance, landing page quality, and other relevancy factors to determine the rank of text ads. Currently, Yahoo’s ad ranking is based solely on cost-per-click bids.

Another element of Yahoo’s response to marketplace challenges are recent distribution deals with eBay and Telemundo, which are expected to be fully deployed early next year, and continued efforts to build some of the “most-coveted inventory on the Web,” such as the redesigned Yahoo home page, Semel said.

Going forward, Semel said Yahoo will stick with its priorities of social media, video, and mobile access. “There are new players in each category, but Yahoo has a well established position in each of these.”

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