Yahoo Profit Drops 26 Per Cent!

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By Vikram Sethi

“We’re pleased that revenue, operating income and EPS were all above consensus this quarter,” said Tim Morse, CFO and Interim CEO, Yahoo, reporting the results of its third quarter earnings. Elsewhere, at the Web2.0 Summit currently underway in San Francisco, Microsoft CEO Steve Ballmer said he was lucky Microsoft’s proposed $44 billion deal with Yahoo did not go through.

Yahoo’s third quarter profit dropped 26 per cent  from the same time period last year. Revenues fell 24 per cent. Yahoo’s revenues excluding traffic acquisition costs (‘revenue ex-TAC’) was $1,072 million for the third quarter of this financial year, a 5 per cent decrease from the same time last year. Income from operations also decreased by 6 per cent to $177 million (compared to $189 million for FY 2010 Q3). Yahoo’s GAAP revenue was $1,217 million for FY 2011 Q3, a 24 per cent decrease from the third quarter of 2010. Net earnings per diluted share decreased 21 per cent to 23 cents.

Financials at a Glance

Quarterly Results (in millions, except percentages and per share amounts)
Q3 2010 Q3 2011 Percent Change
Revenue ex-TAC $1,124 $1,072 (5)%
GAAP revenue $1,601 $1,217 (24)%
Income from operations $189 $177 (6)%
Net earnings $396 $293 (26)%
Net earnings per diluted share $0.29 $0.23 (21)%

Revenue declines were pretty much spread across the board. Display revenue ex-TAC was $449 million, compared to $448 million for the third quarter of 2010, Search revenue ex-TAC was $374 million, a 13 per cent QoQ decrease. Cash flow from operating activities was $356 million, a 3 per cent increase compared to $346 million for the same period of 2010. However, free cash flow was $247 million, a 1 per cent decrease compared to $250 million for the same period of 2010. The company had cash, cash equivalents, and investments in marketable debt securities of $2,870 million,  a decrease of $759 million compared to $3,629 million at December 31, 2010.

Yahoo is going through a rather choppy phase. Its former CEO Carol Bartz was fired in September this year. The earnings beat analyst expectations, and looks like Yahoo is on the long, winding road to recovery, though it could be a long, and probably strange, trip.

Search Alliance Impact

Yahoo’s results for the third quarter of 2011 reflect $53 million in search operating cost reimbursements from Microsoft under the Search Agreement, which amount is equal to the search operating costs incurred by Yahoo in the third quarter. Search operating cost reimbursements are expected to continue to decline as Yahoo fully transitions all markets to Microsoft’s search platform and the underlying expenses are no longer incurred under the company’s cost structure.

Yahoo’s results for the third quarter of 2011 also reflect $4 million in transition cost reimbursements from Microsoft under the Search Agreement.

Business Outlook

Revenue ex-TAC for the fourth quarter of 2011 is expected to be in the range of $1,125 million to $1,235 million. Based on the terms of the Search Agreement with Microsoft, Microsoft retains a revenue share of 12 per cent of the net (after TAC) search revenue generated on Yahoo properties and Affiliate sites in transitioned markets

Tim Morse (CFO and Interim CEO, Yahoo): My focus, and that of the whole company, is to move the business forward with new technology, partnerships, products, and premium personalized content — all with an eye toward growing monetization.

(Vikram Sethi is editorial intern with techtaffy.com. He can be reached at [email protected])