Yahoo boosted by online advertising

updated 7:34 p.m. ET July 19, 2005

SAN FRANCISCO - Yahoo Inc.’s second-quarter profit increased more than six-fold as the owner of the Internet’s most popular Web site cashed in on a hefty investment gain and continued to parlay its expanding audience into an advertising bonanza.

The results released Tuesday weren’t enough to satisfy Wall Street, largely because Yahoo generated most of the earnings growth by selling the remaining chunk of its stake in its archrival, online search leader Google Inc. Yahoo’s stock plunged more than 10 percent in extended trading as investors expressed their dismay with a quarter that revealed a deceleration in the growth of the company’s operating profit.

The Sunnyvale-based company earned $754.7 million, or 51 cents per share, during the three months ended in June. That compared with a profit of $112.5 million, or 8 cents per share, at the same time last year.

Revenue totaled $1.25 billion, a 51 percent increase from $832.3 million last year. After subtracting the commissions Yahoo paid to other Web sites in its advertising network, the company’s revenue stood at $875 million, up 44 percent from last year.

The profit included a gain of $563 million, or 38 cents per share, from selling Google shares, which have soared by 61 percent so far this year. Yahoo acquired the Google stake by investing in its rival’s early development and subsequently settling a patent settlement over the way search engines distribute advertising.

Excluding the one-time investment gain, Yahoo’s earnings matched the mean estimate among analysts polled by Thomson Financial. The revenue, minus advertising commissions, fell slightly below the mean estimate of $881 million, according to Thomson Financial.

Yahoo announced its results after the stock market closed.

Even as investors punished the company, Yahoo CEO Terry Semel hailed the results as the latest chapter in a continuing success story. “This is a very exciting time for our company,” he told investors during a Tuesday conference call. “We have a balanced and healthy business model in which all parts are performing well.”

Despite Semel’s optimism, Yahoo didn’t raise its revenue or earnings estimates for the remainder of the year, another possible source of investor disappointment.

“With a stock like this, you have to beat and raise (expectations) to keep things running,” American Technology Research analyst David Edwards said. “There continues to be expectations that this company is going to outperform and outperform. But you have to take a step back and wonder how much longer it can keeping growing at these rates.”

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