Yahoo's second-quarter revenue slumped as the company coped with higher-than-expected numbers of its sales staff bolting after a reorganization in the division.
The company shifted leaders in its U.S. sales staff, which also triggered changes in its field sales organization. Yahoo Chief Executive Carol Bartz said that those changes led to departures within the division, leaving the company understaffed toward the end of the quarter.
"We underestimated how much the changes would increase turnover," Bartz told analysts today during a conference call after the earnings were released.
With diminished sales staff, Yahoo simply didn't have enough workers selling premium display ads to its biggest customers. Instead Yahoo sold lower-priced ads on its most trafficked sites that didn't generate as much revenue as the company could have.
"We didn't have enough salespeople in front of big clients," Bartz said.
The Web giant posted second-quarter revenue excluding traffic acquisition costs of $1.08 billion. That was a bit below analyst expectations of $1.11 billion. It's also a 5 percent decrease from the second quarter of 2010.
Chief Financial Officer Tim Morse said that the sales force change led Yahoo's sales of display ads to come in $40 million below expectations. For the quarter, Yahoo display revenue excluding traffic acquisition costs climbed just 5 percent to $467 million.
And Morse noted that Yahoo had the inventory to sell the premium ads. The company said the royal wedding in April set one-day traffic records with more than 400 million page views, making Yahoo the Web's top royal-wedding site. News of the death of Osama bin Laden also meant huge business for Yahoo, generating nearly 900 million page views on Yahoo News, 50 million video streams, and 500 million photos viewed in the first week after the military assault.
"By and large, ad supply wasn't an issue," Morse said. "We had ad inventory to sell at premium rates."
Yahoo also continues to struggle with Microsoft's adCenter technology, the system for buying and delivering online ads. In the quarter, Yahoo search revenue excluding traffic acquisition costs fell 15 percent to $371 million. The agreement with Microsoft also led Yahoo to post revenue per search below expectations in the first quarter.
Bartz pointed to "technology limitations" in adCenter. She said the companies continue to work to improve the system, but that they have only closed one fifth of the gap in revenue per search from the amount Yahoo's previous ad platform generated to the amount adCenter is producing for Yahoo today. Yahoo is protected some by revenue guarantees from Microsoft. But those are set to expire next year. Bartz said the company expects to close the rest of the gap before the guarantees go away.
Yahoo fared better at its bottom line. Net earnings for the quarter hit $237 million, up 11 percent from the year-ago period. And earnings per share came in exactly at consensus analyst expectations--18 cents a share, up 18 percent.
Bartz also addressed the ongoing soap opera related to the spinoff of one of the jewels in its portfolio, the Chinese online payments group, Alipay. Shareholders have been concerned that Yahoo--which owns 43 percent of former Alipay parent, the Alibaba Group--might not be getting fairly compensated for the spinoff.
Bartz said the negotiations are complex. Yahoo lawyers are poring over multiple agreements that run several hundred pages.
"We've been working on this agreement continuously, in fact, daily," Bartz said.
Today's earnings release came after the markets closed, and Yahoo shares fell almost 2 percent to $14.32 in after-hours trading.
Updated with details throughout and analysis at 3:46 pm PT.