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Yahoo earnings meet Wall Street forecasts

Yahoo Inc.’s first-quarter profit met analyst expectations as the Internet icon continued to capitalize on the rapidly growing online advertising market.
/ Source: The Associated Press

Yahoo Inc.’s first-quarter profit met analyst expectations Tuesday, relieving investors who feared losses in the Internet powerhouse’s search engine market share might hinder its advertising growth.

Yahoo shares surged more than 6 percent on the news.

The Sunnyvale, Calif.-based company said it earned $159.6 million, or 11 cents per share, during the first three months of the year. That represented a 22 percent decrease from net income of $204.6 million, or 14 cents per share, at the same time a year ago.

It wasn’t an apples-to-apples comparison because of new rules requiring companies to recognize the costs of their employee stock options.

The change, imposed over strident protests from Silicon Valley, is taking an especially large bite from the profits of Yahoo and other high-tech companies that have distributed bushels of stock options to reward their workers.

Yahoo said the accounting change lowered its earnings by $71 million in this year’s first quarter versus $6 million a year ago.

If not for the stock option expenses and other one-time gains, Yahoo said its profit for the just-ended quarter would have improved by 18 percent over the same period last year.

Analysts polled by Thomson Financial had factored the new accounting rules into their average estimate of 11 cents per share.

Revenue for the period totaled $1.57 billion, a 34 percent increase from last year. After subtracting the commissions paid to its advertising partners, Yahoo’s revenue totaled $1.09 million, about $10 million above analyst estimates.

The company released the results after the stock market closed. Yahoo shares gained 33 cents to finish at $31.30 on the Nasdaq Stock Market, then added $1.92, or 6.1 percent, in extended trading.

Yahoo’s robust revenue growth led many investors to conclude online search engine leader Google Inc. will turn in strong numbers when it releases its first-quarter results Thursday. Google’s shares decreased $2.58 to close at $404.24 on the Nasdaq, then rose $11.56, or 2.9 percent, in extended trading.

Before its first-quarter announcement, Yahoo’s market value had declined by 20 percent so far this year, reflecting concerns raised by research reports indicating the company has been steadily losing search engine market share to Google.

The data from both comScore Media Metrix and Nielsen/NetRatings troubled investors because Internet search engines have become the Web’s biggest advertising vehicle.

ComScore raised another red flag this week with a report estimating Google’s U.S. market share had climbed to 42.7 percent in March, up from 36.4 percent last year, while Yahoo’s had shrunk to 28 percent from 30.6 percent last year.

But Susan Decker, Yahoo’s chief financial officer, challenged those findings in a Tuesday conference call. She told analysts usage of Yahoo’s search engine in the past quarter increased by 15 percent to 20 percent from last year.

Yahoo also is gearing up to change the formula it uses to determine which text-based ads should be displayed alongside its search results. Google so far has done a better job of delivering ads that get clicked upon and generate revenue, prompting Yahoo to overhaul the system it uses. Yahoo CEO Terry Semel told analysts the company will provide more details about its new advertising algorithm next month.

Management doesn’t expect the financial gains from the upcoming changes to kick in until next year, prompting Yahoo to reaffirm its previous revenue guidance for 2006.

While many investors have fretted about Yahoo’s prospects, management has maintained the company is in the best spot to capitalize on advertising’s accelerating shift to the Internet.

In a report released earlier this month, Merrill Lynch media analyst Lauren Rich Fine estimated spending on Internet ads this year will increase 27 percent to $14.5 billion, surpassing two more established media markets — magazines and the Yellow Pages.

Although Yahoo hasn’t been as effective as Google in search advertising, it has far more experience serving up ads that feature images and other graphics. That specialty is expected to become important as more major companies try to build their brands on the Internet instead of other traditional media like magazines.

Besides offering more diverse advertising options, Yahoo also boasts the Web’s largest audience — 402 million users through March, up from 365 million at the end of 2005.

“In the whole mix of Internet advertising, we feel like we are sitting in the pole position,” Dan Rosensweig, Yahoo’s chief operating officer, said during a Tuesday interview.