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Yahoo! Inc. (YHOO): Where’s Its Direction?

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Yahoo! Inc. (YHOO)Yahoo! Inc. (NASDAQ:YHOO)‘s most recent quarterly earnings may have topped estimates, but the company did not show any improvement in ad revenues. In fact, in this quarter, search has made a bigger contribution to the top line than ads. The latest ComScore data has shown that Yahoo! Inc. (NASDAQ:YHOO)’s explicit core search market share has slightly increased. But the company’s overall revenues have fallen, and even a rising bottom line cannot hide an eroding core ad business.

Going through the earnings numbers, Yahoo posted a 36% increase in profit to $390 million or $0.35 per share up from $0.23 per share in 2012. Total revenue dropped by 7% to $1.1 billion from last year while revenue excluding traffic acquisition costs remained flat at $1.07 billion.

Display advertising has defined Yahoo! Inc. (NASDAQ:YHOO) for years. It is the company’s reason for existing, but this quarter fell by 11% year over year from $454 million to $402 million. Meanwhile, search revenues overtook display advertising, with revenue there increasing from $384 million to $409 million. So, is Yahoo an advertiser or a search provider? At this point it is neither.

Those numbers are borne out in the breakdown of the two segments. Yahoo! Inc. (NASDAQ:YHOO)’s total number of ads sold fell by 7% along with prices per ad falling 2%. Paid clicks increased by 16%, while price-per-click decrease by 7%. Google Inc (NASDAQ:GOOG) is seeing similar trends with its paid click revenue breakdown. Clicks are up 20% year over year, whereas cost-per-click dropped 4%. Google Inc (NASDAQ:GOOG) can afford to live with this as it has its hands in a number of potentially disruptive technologies, obviously.

Better news for Microsoft

The latest ComScore data, while mildly encouraging for Yahoo! Inc. (NASDAQ:YHOO), is a far better report for Microsoft Corporation (NASDAQ:MSFT) than anyone else as Bing begins to get real traction with the release of Windows 8 and rising profile of Windows Phone. Microsoft sites have cannibalized even Yahoo’s search business. So, while this uptick in search volume is good, Yahoo has a long way to go to create search and advertising density. And that is, frankly, not going to happen.

Explicit Core Search Queries in US (MM)
Mar-12 Feb-13 Mar-13
Total Explicit Core Search 18358 18266 20360
Google Sites 12187 12327 13658
Yahoo! Sites 2523 2111 2410
Microsoft Sites 2808 3048 3431
Explicit Core Search Share in US (%)
Mar-12 Feb-13 Mar-13
Google Sites 66.4% 67.5% 67.1%
Yahoo! Sites 13.7% 11.6% 11.8%
Microsoft Sites 15.3% 16.7% 16.9%

Since the arrival of Marissa Mayer at Yahoo, its stock has risen by more than 50%. But how much of that is due to Mayer’s hand and how much of it is due to the company finally unlocking its assets? The recent price hike was a result of rumors surrounding the IPO of the Chinese e-commerce behemoth Alibaba, in which Yahoo! Inc. (NASDAQ:YHOO) holds a 24% stake. And this is the key to the company’s future. Hope springs eternal that it can sell its Alibaba stake, raise some cash and remake the company.

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