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

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.

When it sold half the stake last year for $7.6 billion, I criticized the move to give more than half of the proceeds to shareholders. Yahoo needs serious capital to remake itself. In essence the company is a startup now with a multi-billion dollar asset portfolio. So, the Alibaba IPO is the best news the firm has had in a while.

In the meantime, the best Mayer can do is continue to focus on exiting from losing ventures while driving towards mobile. Yahoo has recently decided to terminate its email services in China as of August and users can switch to an Alibaba site or starting using the American version of Yahoo, or Gmail or Microsoft Corporation (NASDAQ:MSFT)’s mail service.

In the U.S, Yahoo is permanently shutting down some of its services – such as Yahoo SMS Alerts, Yahoo Kids, Yahoo Deals, the older version of Mai. On the other hand, new apps are being released including Yahoo! Inc. (NASDAQ:YHOO) Mail for iPad and Android and Yahoo Weather for iPhone. Frankly, it is about four years too late, but better late than never, I guess. Cutting the fat is the easy part, however, and returning the firm to profitability isn’t that tough in the short run. The real challenge is finding a successful business with what’s left. When Mayer took over, Yahoo was valued equal to its asset portfolio and its core business had been discounted to zero. That isn’t true today, but it should be.

A company without direction

Mayer is doing exactly what she said she would do when she took over: change the culture and ditch old, irrelevant services. I like Mayer and her sense of what made Google successful, but at this point, Yahoo looks like it has no direction, or at the very least, is waiting for its advertising revenue to crater so that it can purge the past and build a new identity. What that new identity could be in today’s market is anyone’s guess, but,  if the grumblings of employees and investors’ is to be believed, it may not be of Marissa Mayer’s design.

The article Yahoo’s Identity Crisis Continues Despite Profitable Q1 originally appeared on and is written by Peter Pham.

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