Yang Promises 'No Sacred Cows' at Yahoo

By KEVIN J. DELANEY

Yahoo Inc. vowed to refocus its business under new Chief Executive Jerry Yang as it conceded strategic mistakes have hobbled its performance.

The Sunnyvale, Calif., company reported a 2.3% drop in second-quarter profit as its revenue growth rate improved slightly, reversing a steady decline. Yahoo also lowered its financial outlook for the year.

Expectations had been muted. When former CEO Terry Semel abruptly resigned last month and handed the reins to Mr. Yang, Yahoo warned that its second-quarter earnings would be at the low end of its forecasts amid slower-than-expected sales growth in graphical display advertising, such as banner ads.

The company yesterday repeated earlier statements that a much-watched upgrade to its search advertising system known as "Panama" delivered financial gains during the second quarter, while revenue from display ads grew slower than originally expected. It said that revenue from partners that carry search advertising that Yahoo brokers declined, in part because of higher commissions paid by Yahoo to the partners.

Mr. Yang told analysts during a conference call that he planned to spend roughly the next 100 days crafting a long-term strategic plan and making any necessary changes to the company's staff and organization. "There will be no sacred cows and we need to move quickly," he said.

Yahoo's struggles come amid tough competition from Google Inc., which is scheduled to report second-quarter earnings tomorrow. Research firm eMarketer Inc. forecasts that Google will garner 27% of U.S. online-ad revenue this year when commissions paid to partners are factored out, up from 24% in 2006. Yahoo will collect just 16% of such revenue this year, down from 18% in 2006, eMarketer says.

When commissions paid to marketing partners were factored out, Yahoo reported revenue of $1.24 billion for the second quarter, in line with its projection of $1.2 billion to $1.3 billion. Yahoo dropped its predicted range of 2007 revenue, after payments to partners, to $4.89 billion to $5.19 billion, from $4.95 billion to $5.45 billion.

"It was exactly what they telegraphed when they had the management changes," said Gene Munster, an Internet analyst at Piper Jaffray & Co. "The real problem is what happens in the next four quarters."

Yahoo reported its results after regular trading hours. In 4 p.m. Nasdaq Stock Market composite trading, its shares were up 83 cents to $27.53. Yahoo shares fell more than 3% to $26.60 after hours.

While Yahoo in April had predicted its revenue growth rate would resume rising in the second quarter, the rate was only slightly higher than in the first. Revenue rose 8% in the second quarter, compared with 7% in the first and 13% in the fourth quarter from the year-earlier periods. Revenue had risen 26% during the second quarter of 2006 from the year before.

"The weakness is clearly coming from two factors: It's continued display-pricing pressure, and Yahoo continues to lose share to Google in the affiliate search space," said Mark May, an Internet analyst at Needham & Co. LLC, whose firm makes a market in Yahoo shares. "The challenge facing Yahoo is how to reinvigorate growth without depressing profitability."

Yahoo President Susan Decker delineated for analysts what she described as "areas where I think we could have done a better job," including not innovating enough in its display-ad business, and discussed how the company was tackling them.

Breaking with its practice, Yahoo didn't make executives available for interviews following its conference call with analysts.

Write to Kevin J. Delaney at kevin.delaney@wsj.com