updated 7/19/2005 7:34:12 PM ET 2005-07-19T23:34:12

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.”

Yahoo ended June with 181 million active registered users, a 23 percent increase from the same time last year. The audience included 10.1 million subscribers, a 58 percent increase from last year.

The company is hoping to end the year with more than 12 million subscribers, partly by offering new products, such as a discount music rental service that it began testing in May as an alternative to Apple Computer Inc.’s market-leading iTunes store. Yahoo expects to shift the music service out of the test phase and spend more advertising it during the current quarter.

Despite its success, Yahoo has been largely overshadowed by Google, which has been riding its Internet-leading search engine to even more robust earnings growth.

Lifted by the rapid appreciation of its stock this year, Google ended Tuesday with a market value of just under $90 billion while Yahoo’s stock, through Tuesday’s trading on Nasdaq, had inched up by less than 1 percent this year to nudge the company’s market value to $56 billion.

But there is a contingent of analysts who believe Yahoo is better positioned than Google because it isn’t as dependent on a search engine for all of its profit.

While Google generates all but a fraction of its revenue from commercial Web links distributed by its search engine, Yahoo has opened more financial streams by offering more subscription services and selling banner ads to large companies interested in promoting their brands.

Subscriptions accounted for $158.7 million, or 18 percent, or its second-quarter revenue, minus advertising commission.

But search engine advertising remains the Internet’s financial hot spot and Yahoo still hasn’t been able to make a significant dent in Google’s lead. Through June, Google 36.9 percent share of the U.S. market, outdistancing Yahoo’s 30.4 percent share, according to comScore Networks.

The investor backlash to Yahoo’s second-quarter profit highlights the vulnerability of Google’s lofty stock the first time that company doesn’t surpass the earnings expectations set by industry analysts. Excluding special accounting items, Google is expected to post second-quarter earnings of $1.21 per share when it releases its results Thursday.

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