Revenue for the quarter ending June 30 was up just 2 percent from the same quarter last year. Yahoo had expected second-quarter revenue to fall between $1.60 billion and $1.68 billion.
Subtracting commission and other fees paid to partners, revenue was $1.13 billion, short the $1.16 billion that analysts polled by Thomson Financial were hoping for.
The results are not likely to appease investors who have been growing impatient waiting for a turnaround at Yahoo. Google, the search giant and a competitor to Yahoo, recently reported second-quarter revenue that was up 24 percent over last year.
During a conference call to discuss the results, Yahoo CEO Carol Bartz blamed issues with the company's search and display segments for revenue falling below analyst predictions. "We gained share in search but we didn't monetize searches as much as expected," she said.
In the display market, ad spending was healthy but didn't meet expectations because of a period in June when a "handful of big advertisers pulled back," she said. She suspects that those large multinational companies, under pressure from the sluggish economy, cut back on marketing spending to rein in expenses. "By the first week of July, it's like it never happened. We were back to the same run rate we had," she said.
In recent conversations with advertisers, she didn't get the sense that there's a problem indicating continued reduced spending, she said. In addition, she believes it wasn't just a "Yahoo anomaly" but that the companies cut back their marketing spend overall during that short period.
Despite that unexpected pullback, display advertising was up 19 percent in the quarter compared to the same period last year, Yahoo said.
While revenue just barely grew, Yahoo's profit rose faster than expected. Net income for the quarter was $213 million, up 51 percent over the same period last year.
On a pro forma basis, which excludes certain items, net income was $219.88 million, or $0.16 per share, more than the $0.14 that analysts were expecting and up from $145.40 million and $0.10 a year ago.
Yahoo's execution of its search agreement with Microsoft is progressing, Bartz said. Yahoo moved 125 employees to Microsoft and trained hundreds of sales and account management workers at Yahoo.
Yahoo and Microsoft have signed a 10-year deal that will result in Yahoo using Microsoft's Bing search engine to power its search product. Yahoo will also use Microsoft's AdCenter advertising platform for self-serve search ad sales.
So far, Yahoo is still anticipating that it will be using AdCenter in October, but it won't launch prematurely, Bartz said. "It's very important that our advertisers are ready, that AdCenter is ready and we're not going to pull the trigger until we're sure of it," she said. "We feel good but because the holiday season is so important to advertisers, we won't launch unless we have a smooth transition," she said.
Yahoo reported that revenue from marketing services, or advertising revenue, was up 4 percent while revenue from fees, associated with services like Flickr Pro, was down 16 percent over the same quarter last year.
Bartz, who took over at Yahoo early last year, said it will take yet more time for Yahoo to turn around. "There's a lot of transitioning happening, and it will be a few quarters before we begin to see results from investments," she said. Those investments include direct investment internally on products that should improve user engagement as well as partnerships with other companies, she said.
Yahoo said that revenue for the third quarter is expected to be in the range of $1.57 billion to $1.65 billion.
