Woo-hoo for Yahoo! and Yang

In first full quarter under new CEO Jerry Yang, world's second-largest search engine reports results that beat expectations; stock soars.

By Paul R. La Monica, CNNMoney.com editor at large

NEW YORK (CNNMoney.com) -- In its first full quarter under the direction of new chief executive officer Jerry Yang, Internet media titan Yahoo! reported that sales and profits for the third quarter beat analysts' expectations.

Yang also outlined an updated strategy for Yahoo. He stressed that the company was planning to more effectively integrate its numerous assets more directly into the Yahoo home page, add more online advertising partners and open up applications on Yahoo to outside developers.

Wall Street cheered Yahoo's first full quarter of results under co-founder and new CEO Jerry Yang. Shares of Yahoo surged 10 percent after hours after Yahoo beat sales and earnings estimates.

Shares of Yahoo surged nearly 10 percent in after-hours trading following a more than 4 percent decline in regular trading on the Nasdaq Tuesday.

Yahoo's good news also helped lift shares of Google in after hours trading. Google's stock rose nearly 2 percent after the closing bell.

Yahoo (Charts, Fortune 500) reported sales of $1.77 billion, up 12 percent from a year ago. Excluding advertising sales that Yahoo shares with partners, the company reported revenue of $1.28 billion, an increase of 14 percent. Wall Street had been expecting revenue of $1.24 billion, according to estimates from Thomson First Call.

The company reported net income of $151 million, or 11 cents a share, a slight decrease from the $159 million, or 11 cents per share generated in the third quarter of 2006. But Yahoo's profits came in well ahead of analysts' forecasts of 8 cents per share.

The Sunnyvale, Calif.-based company has been struggling to stay competitive against Google (Charts, Fortune 500), which will report its third quarter results on Thursday. Yahoo also has to contend with challenges from smaller search rivals such as Microsoft's (Charts, Fortune 500) MSN, IAC's (Charts, Fortune 500) Ask.com and Time Warner's (Charts, Fortune 500) AOL. (Time Warner owns CNNMoney.com)

Web research firm Hitwise reported Tuesday that Google accounted for 63.6 percent of all searches in the U.S. in September, up from 60.9 percent a year ago. Yahoo was second with 22.6 percent market share, up only slightly from 22.3 percent in September 2006.

Google has widened its market share lead in search over Yahoo in recent months despite the fact that Yahoo has unveiled a new search advertising platform called Project Panama. Yahoo also recently rolled-out updated consumer features on its search sites.

But one analyst said that since expectations were so low for Yahoo, the fact that Yahoo didn't disappoint was a good sign. In other words, people may have been assuming the worst and were pleasantly surprised.

"Things may be more stabilizing. Advertisers are not defecting. If you read into these numbers it seems that Panama must be doing pretty well," said Martin Pyykkonen, an analyst with Global Crown Capital.

Yahoo also gave guidance for the fourth quarter that was roughly in line with what analysts were expecting, news that also probably soothed the Street. Yahoo said it expected sales for the fourth quarter, excluding revenue shared with affiliates, to be between $1.31 billion and $1.45 billion. The current consensus estimate for the fourth quarter is $1.37 billion.

Nonetheless, Pyykkonen said that Yahoo's 14 percent revenue growth in the third quarter was "nothing to get totally jazzed about," particularly since Google is expected to report a sales increase of 58 percent for the third quarter.

Jeffrey Lindsay, an analyst with Sanford C. Bernstein, also said Yahoo's results were not that inspiring and that the company may have benefited from having a relatively low bar to clear on the expectations front. He pointed out that even though sales were up in the quarter, earnings still decreased.

"Year-over-year, profit margins were down. That's an issue. If there was a definite, clear sign of radical improvement, it would have showed up in both the revenue and profits," he said.

In addition, Wall Street has expressed concerns that Yahoo may be losing ground to companies like News Corp.'s (Charts, Fortune 500) MySpace and privately held Facebook in the burgeoning social networking market.

For these reasons, investors were eager to hear what strategic plans, including possible acquisitions and asset sales, Yang has to get Yahoo back on track.

When Yang took over for ousted CEO Terry Semel in June, he promised to provide investors with a new road map for Yahoo within 100 days and added that there were no "sacred cows" at the company.

During a conference call with analysts, Yang said that as a result of the company's strategic review, Yahoo plans to do a better job of integrating sites such as its social networking offering Yahoo 360 and photo sharing site Flickr into other Yahoo sites.

He added that the company plans to open up the site to applications from other developers, a strategy that has won raves for Facebook. He also said the company will try and become a premier online destination for advertisers by partnering with more companies.

To that end, Yahoo announced Tuesday that it had signed multi-year advertising agreements with Cars.com, a site targeting car buyers and sellers owned by a consortium of newspaper publishers, Forbes.com, Ziff-Davis Media and WebMD.

These announcements follow a string of deals announced earlier this year by Yahoo, including partnerships with cable company Comcast, media conglomerate Viacom and social networking site Bebo.

"While we still have a lot to do we have made some important steps and some progress," Yang said.

Clayton Moran, an analyst with Stanford Group, said that Yahoo's new plan was not a major departure but that he thought the company did not need to undertake a massive overhaul.

"There is nothing dramatic they can do to turn around the company on a dime. There's a lot at risk if you change things too much too quickly. New partnerships help and that's the path they should take," Moran said.

Yahoo president Susan Decker added during the call that Yahoo saw an acceleration in growth in the third quarter in display advertising, i.e. sales of ads tied to banners, videos and other non-search ads. She said display ad sales were up 20 percent.

The improvement was a relief to some investors who had been worried that turmoil in the mortgage market would hurt Yahoo since lenders such as Countrywide are big online advertising spenders.

Last year, Yahoo disappointed Wall Street due to what it described as weakness in demand for ads from the automotive and financial services sectors.

"I was most encouraged by the strength in display advertising. That's a nice improvement and it's something people weren't expecting Yahoo to be able to turn around so quickly," Moran said.

Decker also noted that Yahoo hopes to take advantage of the fact that online ad networks and exchanges, companies that help advertisers buy ads across a broad array of sites, are growing more rapidly than stand-alone sites like Yahoo.

Yahoo recently completed the acquisition of online ad exchange firm Right Media and online ad network BlueLithium.

Analysts quoted in this story do not own shares of Yahoo and their firms have no investment banking ties with the company. Top of page