By AMIR EFRATI
Yahoo Inc. has taken numerous steps—including the firing more than a month ago of Chief Executive Carol Bartz—to get back on a growth trajectory. But it promises to be a long road.
The Sunnyvale, Calif., Internet company, which is now shopping itself to potential buyers, on Tuesday said that its third-quarter profit dropped 26% from a year earlier while revenue fell 24%. Yahoo also reported its fourth consecutive quarterly slowdown in the growth rate of its display-ad sales—its most important business, which includes graphical, interactive and video ads. Display-ad sales revenue was flat from a year earlier.
Excluding certain factors, such as what the company calls traffic acquisition costs, recent divestitures and its search-advertising partnership with Microsoft Corp., Yahoo said revenue for the quarter was up 1%, the same as the rate it reported in the second quarter.
By contrast, rival Google Inc. last week reported a 33% rise in revenue, its fourth consecutive quarter in which revenue growth accelerated, boosted in part by gains in display-ad sales at Yahoo's expense. Overall, U.S. online ad spending is rising by more than 20% annually, though Yahoo hasn't been able to ride the wave.
Still, results hit expectations and Yahoo shares rose nearly 3% in after-hours trading to $15.90. During the day, the shares had slipped 1.5% to $15.47 on the Nasdaq.
"We're very pleased," said Yahoo interim CEO and Chief Financial Officer Tim Morse in an interview. "We're very excited about our prospects."
Mr. Morse gave no hint about the status of a "strategic review" that Yahoo and its board have been undertaking. He also declined to comment on suitors—which include private-equity firms such as Silver Lake Partners—that have approached Yahoo or its financial advisers.
As for the CEO search, Mr. Morse said on a conference call: When the board "has something to announce, it will do so. That will take time. It will not be today and not on this call."
The majority of Yahoo's current market valuation lies in its stakes in Asian companies, China-based Alibaba Group Holding Ltd. and Yahoo Japan. Alibaba CEO Jack Ma recently said he was interested in buying Yahoo, but it is unclear whether he has made a serious move to do so. Separately, Yahoo has said it was working on potentially selling its Yahoo Japan stake. Mr. Morse said Yahoo "continues to make progress" on that front.
While many of Yahoo's media sites are growing, its Yahoo Mail and other "communications" properties, which have been the biggest source of ad space, are in decline thanks to Facebook Inc. and other sites. Yahoo in recent years has failed to reverse that trend, and the resulting overall decline in the amount of time people spend on Yahoo sites every month is now showing up in the company's financial figures.
As a result, many of Yahoo's sites are "undermonetized," meaning they aren't generating as much revenue as they could be under different ownership or through new partnerships, said John Aiken, an analyst at ITG Investment Research Inc. Thus, because Yahoo's media sites "are growing at a healthy clip, even if display revenue is weak it's not the end of the world," he said.
Mr. Morse said the higher-priced display-ad sales grew year over year as Yahoo's new sales approach resonated with more advertisers, while the lower-priced, "non-premium side of the equation under-ran our expectations."
The results hit expectations and Yahoo shares rose nearly 3% in after-hours trading to $15.90.
Meanwhile, Yahoo's major Web-search partnership with Microsoft Corp. has so far been a drag on Yahoo's business. But over the quarter, Yahoo saw its second quarter-over-quarter growth in Web-search ads since the partnership went into full force in late 2010. Yahoo also said that it recently reached an agreement with Microsoft to extend a "guarantee" of revenue that Yahoo can earn per search in the U.S. and Canada by one year.
The guarantee extension will make Yahoo more attractive to potential buyers, said Sameet Sinha, an analyst at B. Riley & Co.
Overall, Yahoo posted third-quarter net income of $293 million, or 23 cents a share, down from $396 million, or 29 cents, a year earlier.
Revenue fell to $1.22 billion from $1.6 billion a year ago.
For the fourth quarter, Yahoo projected revenue of $1.28 billion to $1.4 billion. The company also projected income from operations in the second quarter of between $200 million and $260 million, in line with Wall Street's expectations.
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“We are initiating coverage…with a Buy rating and a 21 price target. We believe the next 12 to 18 months should provide a win-win situation for investors: Either the management team will turn this company around, or the mounting investor discontent will force management to take steps to unlock value in its assets.”
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