US Economy: Yahoo's Profits Dip 19% As Firms Cut Back on Internet Ads

The scale of the challenge facing Yahoo's embattled management became clear yesterday as the internet company revealed a 19% fall in quarterly profits and admitted that America's weakening economy is hurting online advertising.

Yahoo, which has been at the center of takeover speculation for much of the year, said that in the three months to June it spent $22m (£11m) on advisers and lawyers to help it fend off Microsoft's unsolicited offer of $47.5bn.

Jerry Yang, the company's founder, said the bid battle had not deterred staff from day-to-day activities, although the firm's profits still fell from $161m to $131m.

"It should be obvious that this has been a challenging period for our employees," said Yang. "But people have remained remarkably focused."

Yahoo said that tough economic conditions had eroded expenditure on display advertising by some clients, particularly those in finance and packaged consumer goods. The company said it remained committed to online searches in spite of Google's widening leadership.

Susan Decker, Yahoo's president, said initiatives such as an application platform, SearchMonkey, provided promising opportunities. "Innovation in search has a long way to go," she said. "Many users still don't get what they want in the first results from their search."

Yahoo's figures came out 24 hours after the company struck a peace deal with billionaire critic Carl Icahn, who was waging a campaign to unseat the entire board. Icahn, who favors a sale to Microsoft, is to become a director.

In unofficial trading after the close of the Nasdaq stockmarket, Yahoo's shares fell by 1.25% to $21.40 - well below the $33 offered by Microsoft's proposed buyout in May. But some said the figures were not as bad as they had feared. Jeffrey Lindsay, an analyst at stockbroker Sanford Bernstein, said: "These results are poor, but relative to what people were expecting, they're not so bad."

With Icahn on the board, Yahoo's leadership team will face greater pressure than ever to improve the firm's performance or to sell assets such as the company's Asian interests. Yang made it clear that he intends to remain chief executive: "I'm more excited than ever to push Yahoo to the next stage, and I look forward to updating you on progress," he said.