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Yahoo Blames Microsoft Search Deal for Declining Revenue in Q1 2011


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It's been two years since Carol Bartz took the reign of Yahoo with the promise that the company would turn around its fortunes and it would find its core focus. But it doesn't seem to be happening yet, revenue dropped again in Q1 2011 and income saw a similar decline.

Yahoo blamed the Microsoft search deal and the shortcomings of the Microsoft ad network for the drop in search revenue, but that was not the only factor that led to the poor numbers.

"[GAAP revenue was down] primarily due to the required change in revenue presentation related to the Search Agreement and the associated revenue share with Microsoft," Yahoo said in its Q1 financial report [PDF].

"For transitioned markets (U.S. and Canada), Yahoo! now reports revenue associated with the Search Agreement on a net (after TAC) basis rather than a gross basis," Yahoo explained.

"Excluding the impact of these two items and the impact of the divestitures of Zimbra and HotJobs, broadband deferred revenue amortization, and certain fee rate reductions, revenue for the first quarter of 2011 decreased 8 percent compared to the first quarter of 2010," it added.

Revenue was $1.064 billion in Q1 2011 after deducting traffic acquisition costs (TAC), a 6 drop from the same period last year. Yahoo says that without the impact of the Microsoft search deal, revenue would have been flat, hardly a great result for the company.

Net income was down as well, it suffered a 28 percent drop from the same quarter in 2010, going from $310 million to just $223 million in Q1 2011.

On a GAAP basis, search revenue saw a huge drop, Yahoo lost almost half of its revenue from search advertising in a year. Search revenue was $455 million, down 46 percent from last year's $841 million.

Excluding traffic acquisition costs, search revenue saw only a 19 percent drop, still a significant decline.

It's not all bad news, display revenue is up 10 percent when excluding TAC, but display has always been one of Yahoo's strengths and the growth wasn't enough to offset the massive losses in search revenue. Still Yahoo says it will get better and that search will start paying better in the second half of 2011.

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