Zacks_Analysts' Blog : Yahoo! Reports In-Line, Misses on Revenue - Analyst Blog

It was an 18% increase over the same quarter in 2010, however.

Revenue Falls Short

Revenue excluding traffic acquisition costs (revenue ex-TAC) came in at $1.076 billion, a 5% decline from the same quarter in 2010. Revenue fell short of the Zacks Consensus Estimate of $1.104 billion.

The decline was due in large part to the revenue share related to the search agreement with Microsoft (MSFT). Under the terms of the deal, Microsoft receives $12 of every $100 in ad revenue generated from clicks alongside ads next to search results.

Excluding this item and other special items, revenue ex-TAC for the first quarter of 2011 rose 1% year-over-year.

Overall, search revenue ex-tac fell 15% from the same quarter in 2010 but jumped 31% from Q1. Display revenue, which accounted for 43% of total revenue, climbed 5% year-over-year but fell 1% from the previous quarter.

Meanwhile, operating income increased 9% over the second quarter of 2010 due to lower operating expenses.

Buying Back Shares

Yahoo! repurchased 30 million shares in the quarter for $472 million. Most of these repurchases came from its existing cash balance as free cash flow for the quarter came in at just $96 million, 25% below the same period in 2010.

The company ended the quarter with $3.255 billion in cash, cash equivalents, and marketable securities.

Outlook

Management expects third quarter revenue ex-TAC between $1.050 billion and $1.100 billion. Total expenses less TAC are expected to be in the range of $915 million to $935 million.

The company projects operating income between $135 million and $165 million.

It did not give specific EPS guidance, but the Zacks Consensus Estimate for the third quarter is currently 19 cents.

Shares were down more than 2% after hours. Yahoo! is a Zacks #3 Rank (Hold) stock.