SAN FRANCISCO (Reuters) - Yahoo's uninspiring quarterly sales forecast disappointed Wall Street and underscored how the one-time Internet leader is struggling to keep up with Google and Facebook.
Investors have pressured Yahoo, the leader in display advertising, and Chief Executive Carol Bartz to deliver growth and revive its stock price, amid talk that private equity firms are exploring a buyout of the $20 billion company.
"She was already on the hotseat. I don't think she's off the hotseat. The results have not shown any kind of real improvements," analyst Yun Kim of Gleacher & Co said of Bartz.
During a conference call with analysts on Tuesday, Bartz defended the company's progress on her watch, citing improvements to Yahoo's technology that have made it nimbler, as well as a doubling in operating margins to about 12 percent in the third quarter.
"We're working to reverse years of decelerating growth," said Bartz, who joined in 2009 and has since laid off staff and shed various Web businesses.
Bartz did not comment on the private equity talk. Yahoo shares have gained more than 6 percent since reports last week that a variety of private equity firms, including Silver Lake Partners, were exploring a potential buyout of the company -- possibly in partnership with the likes of AOL Inc or News Corp.
"It would make sense if they did something with AOL because the business is at the point where it's a game of scale," said UBS analyst Brian Pitz.
"Having the largest amount of display advertising ... and ability to take out a large amount of costs, could be pretty compelling, but it's easier said than done. There's a lot of politics involved and reasons why it wouldn't happen."
Sources have said any buyout deal would be contingent upon Yahoo selling its 40 percent stake in China's Alibaba Group. This would drastically reduce Yahoo's market value of almost $20 billion now, making a deal more feasible.
But Yahoo has indicated that it is not in any hurry to rid itself of its prized assets.
"To this day no other Internet company outside of China has done as well with their investment in country as we have," Bartz said.
Shares of Yahoo edged 16 cents higher to $15.65 in extended trading despite the lackluster quarterly financial results.
Kim of Gleacher & Co said Yahoo's stock may have held steady because many investors didn't have high expectations for the company. Moreover, the ongoing speculation about a Yahoo buyout or a sale of Yahoo's Asian assets has buoyed the stock in recent days, she added.
Yahoo is one of the world's most popular online destinations, and the No. 2 U.S. search engine behind Google. But the Web portal is facing increasing competition from social networks like Facebook as well as from Google.
Last week, Google reported that its third-quarter gross revenue rose 23 percent year-over-year to $7.29 billion, and said the company's display advertising business was generating an annualized revenue run rate of more than $2.5 billion.
Analysts noted that Google's display revenue figures were not directly comparable to Yahoo's results. But Benchmark Co analyst Clay Moran said the 17 percent revenue growth from online display ads on Yahoo's owned and operated websites during the third quarter was weaker than expected.
Yahoo said revenue from search ads fell 7 percent year-over-year, though executives said the 1 percent increase in revenue-per-search marked the first increase in two years. And the company said it expected the transition to Microsoft Corp's search advertising system in the United States and Canada to be completed by the end of the month.
Yahoo projected fourth-quarter revenue, excluding traffic acquisition costs, of $1.125 billion to $1.225 billion. Analysts were looking for revenue of $1.26 billion, according to Thomson Reuters I/B/E/S.
"We feel pressure to execute on our plan, as we should. We need to deliver on our plan to deliver shareholder value. And when we do that the share price will take care of itself," Chief Financial Officer Tim Morse told Reuters.
"We're doing a terrific job in some areas. In others, we're clearly in transition, and I think it's fair to want to see more from us in the future before people believe fully in the (growth) targets."
Net income in the three months ended September 30 was $396.1 million, or 29 cents a share, compared with $186 million, or 13 cents a share, in the year-ago period. But Yahoo said its earnings included a 13 cent benefit from the sale of its "HotJobs" Web service. Analysts had expected earnings of 15 cents a share.
Net revenue, which excludes revenue it shares with website partners, totaled $1.12 billion in the third quarter, compared with $1.13 billion in the year-ago period and slightly below the $1.13 billion expected by analysts.
Yahoo's shares held steady in extended trading after closing 2.7 percent lower at $15.49 on Nasdaq.
Writing by Edwin Chan; With additional reporting by Gabriel Madway and Liana Baker; Editing by Richard Chang