Tech Investing July 21, 2009, 9:00PM EST

Yahoo: Too Early to Call a Turnaround

Signs of an Internet advertising comeback are absent as ad revenues and operating profits fall

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With a disappointing second-quarter earnings report and outlook for the current quarter, Yahoo provided few signs that a slump in Internet advertising will abate anytime soon.

The Internet company said on July 21 that the poor economy continues to hobble its mainstay online display ads as well as search advertising. "Overall, we're seeing less fear in the marketplace and advertisers are making plans," Yahoo (YHOO) Chief Executive Carol Bartz told analysts during a conference call. But "it's just too early to call" a turnaround, she said.

Yahoo also said it will need to make some costly investments in its far-flung online properties, in promoting its brand, and in its advertising systems. The investments will mean lower revenues and higher costs in the near term. That led investors to sell Yahoo shares after the stock market closed. The shares fell about 3% in extended trading, after closing down 26¢, or 1.53%, at 16.75, on July 21.

New Microsoft Speculation

Yahoo's results come amid renewed speculation that a search advertising deal with Microsoft (MSFT) is back on the table, possibly closing as early as this week. Moreover, activist investor and Yahoo director Carl Icahn on July 18 said he's in favor of such a deal. Microsoft would likely pay Yahoo several billion dollars up front for Yahoo's search ad business and guarantee Yahoo ad payments over a period of several years.

But after a year and a half of on-again, off-again talks following the software giant's unsolicited bid in February 2008 to buy all of Yahoo, such a deal remains uncertain. And the steep decline in Yahoo's search ad revenues won't help its leverage in negotiations. That leverage already had been reduced in the minds of many analysts following Microsoft's recent launch of its Bing search engine. It has captured some market share, and even drew kudos from Bartz, who said, "I think actually Bing's a good product."

In the second quarter ended June 30, Yahoo's net income rose 8%, to $141 million, from a year ago. The company earned 10¢ per share, or 2¢ more than Wall Street analysts expected. A year ago, Yahoo earned $131 million, or 9¢ per share. Net revenues after payments to Web advertising partners fell to $1.14 billion, from $1.35 billion a year ago. Gross revenues were down 13%, to $1.57 billion. "It's not great," says Chief Financial Officer Tim Morse, who took over the job July 1, in an interview. But Morse points out that gross revenues would have declined by only 6% excluding currency rate fluctuations, the sale of a unit, and lower fees from services the company has de-emphasized.