updated 7/17/2007 5:39:04 PM ET 2007-07-17T21:39:04

Yahoo Inc.’s financial malaise dragged on during the second quarter as the Internet icon’s profit slipped slightly and revenue growth lagged behind the pace of the online advertising market that it once led.

The results and a dimmer outlook released Tuesday left little doubt why Yahoo decided to replace Chairman Terry Semel as chief executive toward the end of the second quarter.

Yahoo’s new CEO, co-founder Jerry Yang, tried to assure analysts in a conference call that he realized the Sunnyvale-based company needs to make dramatic changes. He promised there would be “no sacred cows” as he analyzes which parts of the business should be jettisoned so the company can focus its resources on developing technology that will revive earnings growth.

“I am very aware of the challenges we face,” said Yang, who hopes to complete his evaluation within the next 100 days. “There is a significant gap where we are today and where we need to be.”

The overhaul isn’t likely to include mass layoffs, according to Yang and other executives who participated in Tuesday’s call. The management team emphasized the company’s work force will likely expand from the 12,400 employees on the payroll at the end of June, with most of the hiring focused in its online search and advertising departments.

Before he stepped down, Semel repeatedly promised a turnaround that never happened. That letdown may give Yang little time to produce higher profits before exasperated shareholders rebel and pressure Yahoo into considering a sale to possible suitors like Microsoft Corp., said RBC Capital Markets analyst Jordan Rohan.

“This is growing old,” Rohan said. “I would like to see more immediate changes. Things are looking pretty bleak right now.”

Management offered little hope for better times this year. After subtracting commissions paid to its advertising partners, Yahoo expects its revenue for the full year to range between $4.89 billion and $5.19 billion. In April, the full-year forecast anticipated revenue from $4.95 billion to $5.45 billion.

Yahoo shares gained 83 cents to finish Tuesday’s regular session at $27.53, then retreated by $1.13 in extended trading after the second-quarter results and revised outlook were released. The stock has plunged by more than 30 percent since the end of 2005.

In the three months ending in June, Yahoo earned $160.6 million, or 11 cents per share, a 2 percent decline from net income of $164.3 million, or 11 cents per share, at the same time last year.

It marked the sixth consecutive quarter in which Yahoo’s profit has dropped from the previous year.

Revenue for the period totaled $1.7 billion, an 8 percent improvement from last year. But the overall online advertising industry has been growing at a far faster clip, with Yahoo’s biggest rival, online search leader Google Inc., leading the way.

Google’s revenue soared by 63 percent during the first quarter and analysts believe the company will report an increase in the same range when it announces its second-quarter results Thursday.

The Internet ad market is on track to grow by 29 percent this year, estimates industry research firm eMarketer Inc.

Excluding ad commissions, Yahoo said its revenue stood at $1.24 billion, an 11 percent increase from last year.

The earnings and revenue both matched the estimates among analysts surveyed by Thomson Financial. Analysts had lowered their projections last month when Yahoo management’s advised that the second-quarter results would likely fall on the low end of guidance provided in April.

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