Yahoo Profit Falls 38 Percent

Yahoo Inc. shares fell Wednesday after reporting a drop in its third-quarter profit and saying it will end a disappointing year with a financial letdown in the fourth quarter.

Yahoo shares fell $1.16, or 4.8 percent, to close at $22.99 Wednesday on the Nasdaq Stock Market.

After the markets closed on Tuesday, Yahoo announced a 38 percent drop in its third quarter profit and dimmed the revenue outlook for the crucial holiday shopping season. Chairman Terry Semel acknowledged the company's recent difficulties in a conference call and vowed to fix them with a "back to basics" approach.

Semel punctuated his pledge by announcing Yahoo had finally started to roll out much-anticipated improvements to its system for selling and distributing ads tied to search terms and other topics displayed on Web pages.

Yahoo also acquired a provider of online marketing tools and bought a 20 percent stake in Right Media Exchange, an advertising bazaar.

The improved ad platform, which Yahoo abruptly delayed three months ago, is considered the key to the company's comeback efforts. The changes aren't expected to begin boosting Yahoo's profits until next year.

"I am not satisfied with our current financial performance, and we intend to improve it," Semel assured analysts during a conference call Tuesday. "We are not exploiting our considerable strengths as well as we should be."

Yahoo missed its financial targets in the third quarter, a shortfall that investors already knew was coming. Semel braced Wall Street last month by warning Yahoo's revenue had slipped late in the quarter because of a decline in automobile and financial services advertising.

The Sunnyvale-based company earned $158.5 million, or 11 cents per share, for the three months ended in September. That compared with net income of $253.8 million, or 17 cents per share, in the same period last year.

The quarters weren't totally comparable because of new accounting rules requiring Yahoo to deduct the cost of employee stock options from this year's profit.

Still, the results matched analyst expectations, according to Thomson Financial.

Revenue for this year's quarter totaled $1.58 billion, a 19 percent increase from $1.33 billion last year.

After subtracting commissions Yahoo paid its advertising partners, third-quarter revenue totaled $1.12 billion, slightly below analysts' already lowered expectations.

Yahoo didn't give investors any reason to feel better about the fourth quarter, traditionally the company's most lucrative because the holiday shopping season encourages more advertising.

Excluding ad commissions, Yahoo forecast its fourth-quarter revenue will range from $1.15 billion to $1.27 billion. The average analyst estimate had been $1.30 billion, according to Thomson Financial.

Wall Street has been frustrated with Yahoo for most of this year, largely because the company hasn't been targeting online ads as effectively as Google Inc., the Internet search leader that runs the Web's largest marketing network.

Yahoo's improved ad platform, code-named "Panama," is designed to close the gap with Google.

Although Yahoo continues to run the most trafficked Web site on the Internet, the company faces a stiffening challenge from recent upstarts like News Corp.'s, and, which Google is buying for $1.65 billion.

Despite those threats, Yahoo ended September with 215 million active registered users, a 16 percent increase from the previous year. Yahoo said visitors also were poring through more content on its site, viewing nearly 4 billion Web pages in the third quarter, a 24 percent increase from last year.

But those numbers haven't translated into similar earnings growth, a problem that has battered Yahoo's stock.

"There are definitely legitimate concerns" about Yahoo, said American Technology Research analyst Rob Sanderson. "It has become a 'show-me' stock and (the company) hasn't been showing much."


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