Yahoo sees profits widening in next few years as revenue rises, search expenses fall

Yahoo paints brightening picture through 2013

SAN FRANCISCO — Yahoo Inc. raised its financial targets Wednesday, reflecting expectations that the Internet company will attract more online advertisers as it reaps savings from an upcoming search partnership with Microsoft Corp.

In a Wednesday presentation for stock market analysts, Yahoo projected its operating profit margin will range from 18 percent to 24 percent by 2013. That’s more ambitious than the margin of 15 percent to 20 percent forecast by the company in its last all-day meeting with analysts seven months ago.

Yahoo is planning on its annual revenue to increase by an average of 7 to 10 percent through 2013. The company’s revenue declined 10 percent last year as the recession drove down Internet ad rates and shrunk marketing budgets. This year started off better, with revenue edging up 1 percent in the first quarter.

Last year’s downturn turned another Yahoo forecast into a broken promise. In early 2008, Yahoo released a financial blueprint calling for net revenue growth of about 25 percent in 2009 and 2010. That rosy outlook came while Yahoo co-founder Jerry Yang was trying to fend off an unsolicited takeover attempt by Microsoft.

Yahoo hired Silicon Valley veteran Carol Bartz to replace Yang as CEO 16 months ago in an attempt to snap out of prolonged financial funk and lift the company’s sagging stock. The shares gained 14 cents Wednesday to close at $15.45, far below Microsoft’s last offer of $33 per share two years ago.

Microsoft is now responsible for key piece of Bartz’s turnaround strategy by providing the technology that will power Yahoo’s search engine and provide ads ties to the requests made by users.

Yahoo will keep 88 percent of the revenue from search ads clicked on its website while spending less on engineers, computers and research to deliver the results. By 2013, Yahoo expects the Microsoft deal to be producing at least $650 million in annual savings. Overall, Yahoo expects its annual costs to rise by an average of 2 percent to 3 percent through 2013.

Microsoft is expected to start delivering some of Yahoo’s search results late this year. The transition won’t be complete, though, until next year.

Bartz also has been closing or selling some of Yahoo’s less profitable services while bringing in more content from other popular Internet hangouts such as Facebook, Twitter and online game maker Zynga. She is hoping those services will help keep people on Yahoo’s website for longer periods of time.