Shares of Yahoo dropped heavily in pre-market trading in New York on Wednesday after the internet portal company on Tuesday unveiled earnings that fell short of market expectations and indicated that profit margins would slip this year on higher investment spending.

The rare earnings miss led to an 11 per cent slump in the company’s shares, wiping out most of the gains of recent months.

Yahoo executives blamed the shortfall on bigger investments the company has been making to expand its global audience. These included the new “Connected Life” initiative, announced at the Consumer Electronics Show earlier this month, to extend the internet portal’s reach onto mobile handsets and television sets, as well as recent acquisitions such as the purchase of internet “tagging” company, said Sue Decker, chief financial officer.

The company also said that its reported revenue growth would slow this year and profit margins would slip due several to several one-off factors. These include the restructuring of its business in China and the loss of highly profitable business from MSN.

Terry Semel, chairman and chief executive officer, characterised some of the investments due this year, including new data storage capacity and facilities to house the company’s expanding workforce, as one-off costs that would not be repeated every year. “I didn’t want to slow it down at all for a couple of points of margin,” he said in an interview on Tuesday.

In a conference call with analysts, he said that the internet advertising market was still in the early stages of a “significant platform shift”, and that “now is the time to make new investments” to assemble a global audience to capitalise on the shift.

Despite the earnings disappointment, Yahoo’s net revenues for the quarter, at $1.068bn, were in line with expectations, and up 36 per cent from a year before. Net revenues exclude traffic acquisition costs, which Yahoo pays to other websites that carry its search engine-related advertising. Including these costs, gross revenues were $1.5bn, up 39 per cent.

Mr Semel also outlined planned changes to Yahoo’s search business to boost its performance and narrow the gap with Google, which has emerged as the most effective search engine for advertisers. According to Mark Mahaney, internet analyst at Citigroup, Google’s “click-through rate”, or the percentage of internet users who click on an advert, was double that of Yahoo last September, at 21 per cent.

Yahoo was working to improve its search algorithms to improve the matching and relevance of results returned to internet users, making it more likely they would click on ads, said Mr Semel. Other changes include an extension of Yahoo’s search advertising service for small web publishers and the launch of new tools to make it easier to place advertising online.

The internet company’s latest figures included a large one-off gain thanks to the recent restructuring of its Chinese operations, which have been merged with local internet company Alibaba. Including this, reported earning per share jumped to 46 cents a share, up from 25 cents a share the year before.

Without this one-off benefit, earnings would have been 16 cents a share, Yahoo said, compared with Wall Street expectations of 17 cents a share.

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