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Tough Times for Yahoo as Profit Plummets

Yahoo earnings
Embattled Web pioneer Yahoo reported a nearly 19 percent drop in profit today as it faces a tough economy and lingering uncertainties about the company's future in the wake of its talks with off-again, on-again suitor Microsoft.

Yahoo's (NASDAQ: YHOO) second-quarter net income checked in at $131 million, or 9 cents a share.

Excluding one-time costs paid to Yahoo's affiliate sites, Yahoo posted net revenue of $1.35 billion, up 8 percent, but short of the Street's consensus of $1.37 billion, according to analysts polled by Thomson Reuters.

Yahoo posted gross revenues of $1.798 billion, up 6 percent and in the middle range of its own guidance.

In part, Yahoo's earnings reflect the creeping impact that the souring economy has had on the online ad market, seen most recently in Google's disappointing second quarter.

Nonetheless, in a statement announcing the numbers, CEO Jerry Yang tried to put the best face on his company's prospects.

"Yahoo is executing against its strategy, and we believe is well positioned for long-term growth and maximizing stockholder value," Yang said. "We are seeing validation that we have the right strategy as we continue to make transformational investments that position us to take advantage of pivotal trends driving growth on the Internet."

The slack second-quarter earnings come amid Yahoo's very public fight for its survival, a high-profile fugue set in motion by Microsoft's (NASDAQ: MSFT) bid to buy the company back in February. In the time since, Yahoo has faced greater scrutiny than in any period of the company's history, making headlines daily for the latest jots and turns in its struggle for investor confidence.

Most recently, Yahoo announced an accord with Carl Icahn, the billionaire investor who had been lobbying for control of the company's board at its annual meeting Aug. 1.

Under the agreement, Icahn abandoned the proxy war in exchange for a seat on the company's board, along with spots for two of his recommendations.

That truce, which followed two months of sharp rhetoric and pointed accusations from both sides, touched off a wave of speculation among analysts that a deal with Microsoft now was less likely.

There was no discussion of ongoing talks with Microsoft today during Yahoo's conference call with financial analysts.

Yang and the other executives instead used the call as a platform to reiterate the company's commitment to execute its turnaround strategy.

"This is not business as usual." Yang said. "Now more than ever, our most fundamental mission is to maximize shareholder value."

Yahoo continued to talk up its search-advertising deal with Google (NASDAQ: GOOG), which it expects to produce $250 million to $450 million in operating income in the first year of its implementation. The two companies voluntarily put the deal on hold to accommodate an antitrust review by the Department of Justice.

Through the Google deal and a barrage of recent company initiatives in search, advertising and mobile, Yahoo has sought to convince investors that it is capable of delivering value as a standalone company. Facing a flight of top executives, Yahoo also announced a major internal reorganization at the end of June.

Following the breakdown of talks of a full sale to Microsoft in May, the software giant has pursued an alternative transaction through which it would buy Yahoo's search business in a bid to close the market gap with Google.

Yahoo has rejected those offers, though it has maintained that it is still open to a full or partial sale to Microsoft if the terms were right.

Instead of discussing any deal with Microsoft, however, Yahoo President Sue Decker talked up her company's own prospects in search, noting that it had recently posted two successive months of gain in market share, according to figures from comScore.

Decker said initiatives such as SearchMonkey, which will allow developers to annotate search results, and the recently launched BOSS (Build your Own Search Service) position Yahoo to gain back market share in what she described as a still-youthful market.

"Innovation in search still has a long way to go," she said.

Update adds comments from Yang and Decker.