The number two search engine in the United States turned in a fantastic third quarter, far ahead of expectations. Cost-cutting, layoffs and business divestitures led to a surge in Yahoo's (NASDAQ: YHOO) profits and a 4.8% increase in share price in extended trading on Tuesday evening. Net income more than tripled to $186.1 million (13 cents per share) from the third quarter of 2008's result of $54.3 million (4 cents a share). Sales (exclusive of fees passed to partner sites) reached $1.13 billion, slightly above the $1.12 billion expected by analysts, according to a Bloomberg survey.
With the advertising market in rough shape and competition from Google (NASDAQ: GOOG) continually rising, Yahoo refocused on its core properties: the home page, messaging and mobile services. The company trimmed what it didn't need, which is why it was able to boost its earnings even with a decline in revenue. Increased ad revenue from auto manufacturers, travel companies and consumer product manufacturers also helped.
Yahoo's chief financial officer, Timothy Morse, says that the company's markets are "starting to stabilize." Of course, Yahoo itself must be doing something right: its share price is up 41% this year.
A climbing stock price and wave of cuts may be in the past, but expect more. The online ad market is expected to shrink by 2.9% this year. So Yahoo will need to find new ways to manage costs -- finding new revenue is going to be a grind. You can't cut your way to growth, but you can control expenses until the market turns, which would be prudent for Yahoo at this point.
Dealing with the competition will be crucial, as well. Its deal with Microsoft (NASDAQ: MSFT) to use Bing to power Yahoo searches will lead to further cost savings, it seems, and provide a ready-made solution to the competition problem. With Bing, Microsoft has gained 9.4% of the search market (up from 8%), while Yahoo's share has fallen from 20.1% to 18.8%. Google remains in the driver's seat, with a search market share of 65%.
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