SUNNYWALE, California: Yahoo Inc. reported its profit for the second quarter of the fiscal had fallen sharply to $164.3 million, down 78 per cent from $754.7 million in the second quarter of 2005.

The company explained in Q2 2005, it had a large one-time investment gain and did not include the cost of employee stock options in its results. The company had realized $552 million windfall by selling its remaining stake in Google Inc. New accounting rules also required it to deduct the cost of employee stock options from its profit.

Revenue for the second quarter ended 30 June totaled $1.58 billion, which is a 26 per cent increase over $1.25 billion posted last year. After deducting the commissions the company paid to other websites in its advertising network, the revenue stood at $1.12 billion, which is a 28 per cent appreciation over last year’s.

The company disappointed investors as it revealed that it is postponing the introduction of a new online advertising system. Shares slid immediately — by as much as 14 per cent — after the results were announced.

Investors reacted when the Yahoo management told an analyst conference later that the new formula it is developing for displaying ad links will be delayed by at least two or three months. The new platform had been an eagerly awaited move by the company, which is expected to help the audiences. The clicks on the ads are critical because they trigger commissions for Yahoo and its partners.

Yahoo chairman Terry Semel admitted rival Google’s financial growth during the past two years had exceeded Yahoo’s partly because of a better formula for determining which ads to display alongside search results.

Semel said he does not want to risk a hiccup as advertisers ramped up their spending for the holiday season. He said the company has made “strong progress” on the upgrade in recent months, but that testing and integration issues are delaying the formal launch.

The company generated 88 per cent of its total sales from marketing, including advertisements on search results pages and branded advertising from across its non-search properties. It does not provide a break-up of revenues from the marketing division. The balance of sales came from fee-based businesses, like broadband access, premium mail services and dating services. It generated $190 million in its fee business, which is up 19 per cent from a year ago.

The company had 14.3 million paying members at the end of the quarter. It expects the figure to reach 16 million at the end of the year.

The company said it is reaffirming a net revenue forecast of $4.60 billion to $4.85 billion for the current fiscal, against analysts’ expectation of $4.69 billion to $4.90 billion.

For the third quarter, it forecast revenue of $1.12 billion to $1.23 billion against analysts’ expectation of $1.15 billion to $1.24 billion.

The disclosures had an impact on the stocks of leading online companies, with Google eBay Inc. and China’s Baidu Inc. all losing 3 per cent.