Slowdown in Online Advertising Hits Yahoo

SAN FRANCISCO — With the slowing economy taking a toll on the online advertising business, Yahoo said Tuesday that its net income dropped by nearly 19 percent in the second quarter from a year ago as revenue grew at a sluggish 6 percent rate.

Analysts said the results would do little to improve Yahoo’s negotiating position with Microsoft, which has tried to buy all or part of the company. “This is not a quarter where they can go back to Microsoft and say they deserve a higher price,” said Youssef H. Squali, an analyst with Jefferies & Company. “And Microsoft can’t come to them and say the business is falling out of bed and we can pick you up for a song.”

Jerry Yang, the co-founder and chief executive, said he was pleased with the company’s performance, especially in light of what we described as “extraordinary events,” including Microsoft’s takeover attempts and the proxy fight with the investor Carl C. Icahn, which was settled Monday.

“The indicators of Yahoo’s progress are promising,” Mr. Yang said in a conference call with investors.

The results fell slightly short of analysts’ lowered expectations. But to the relief of investors, Yahoo left financial forecasts for the remainder of the year largely unchanged despite ongoing economic uncertainty.

Yahoo said that net income for the quarter was $131 million, or 9 cents a share, compared to $161 million, or 11 cents a share, a year ago. On average, Wall Street analysts had expected Yahoo to report net income of 11 cents a share. Yahoo said its profit was hit by $22 million in costs associated with the negotiations with Microsoft, the proxy fight and related lawsuits.

Revenue was $1.8 billion, compared with $1.7 billion in the same quarter last year. Net revenue, which excludes commissions to advertising partners, was $1.35 billion, up 8 percent, from $1.24 billion a year ago. On average analysts expected net revenue to be $1.37 billion.

By comparison, rival Google reported last week that its revenue for the second quarter grew at 39 percent.

During the conference call, Yahoo’s president, Susan Decker, highlighted the importance of keeping Yahoo’s search advertising and display advertising business together. Noting that Yahoo’s share of search queries in the United States had inched up in the past two months — after months of declines — she said that she believed Yahoo could succeed in the search business, where it is a distant second to Google.

Her remarks appeared aimed at persuading shareholders that the company was right in rejecting recent offers by Microsoft to buy Yahoo’s search business.

Despite the truce with Mr. Icahn, who agreed to drop his fight for control of the company in exchange for three seats on an expanded Yahoo board, Yahoo shares remain in a slump and the company is facing mounting questions about its plans to reignite growth in the wake of its failed talks with Microsoft.

Earlier this year, Yahoo executives gave a rosy three-year forecast for growth, which few investors believe the company will be able to meet. And many shareholders, including Mr. Icahn, believe that the best course of action is for Yahoo to resume negotiations with Microsoft.

On Tuesday, Yahoo’s shares closed at $21.40, down 1.25 percent, and far below the $33 a share that Microsoft offered for the company on May 3. After Yahoo rejected that offer as too low — it wanted at least $37 a share — Microsoft withdrew it and said it was no longer interested in buying all of Yahoo. In the face of growing shareholder discontent, Yahoo has said recently that it would consider selling itself for $33 a share.

Yahoo shares rose to $21.89 in after-hours trading following the company’s financial report.