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Yahoo! Looks Forward With Bartz

Posted on Wednesday, Jan 28th 2009

Eight days since Carol Bartz became the CEO of Yahoo! and already she needed to defend the company’s lackluster Q4 results, which were in stark contrast to its competitor Google’s impressive performance.

Q4 revenue of $1.806 billion was in line with the market’s expectations and represented a 1% drop over the year. EPS of $0.17, however, came in substantially higher than expectations of $0.13 and grew 22% over 4Q07. Yahoo! had 2008 revenue of $7.2 billion, a 3% increase over 2007. For the full year, EPS of $0.46 was flat with 2007 EPS figures.

By segment, marketing services revenue was $1.16 billion for the quarter and $6.3 billion for the year, a 4% increase over 2007. Owned and operated display revenue, however, declined by 2% in Q4. Fees revenue for the quarter declined 12% due to the ongoing transition of Yahoo!’s broadband partnerships to an ad revenue sharing model.

In the quarter, Yahoo! sold off their France-based comparative shopping site, Kelkoo, for about €100 million to Jamplant Ltd, a UK-based private equity firm. Yahoo! had acquired Kelkoo in 2004 for €475 million. Kelkoo generated revenue of $80 million in 2008.

Yahoo! made progress on a number of innovations for users and advertisers, including developing major new platforms like APT to simplify the process of buying and selling display advertising, and YOS to enable more seamless development and social user experiences. They continued their initiatives in search through the launch of Search Assist, SearchMonkey, BOSS and Yahoo! Buzz, which allows user votes to influence the content shown on the Yahoo! homepage or increase traffic to their own sites.

In view of the poor economic conditions, management refrained from giving an annual outlook. However, they did give Q1 revenue outlook of $1.525-$1.725 billion with operating cash flow of $0.365-$0.415 billion. In the fiscal year 2009, in addition to reduction in revenue on account of Kelkoo’s sale and currency devaluation, Yahoo! expects fee revenue recognition from their broadband partnerships and fee revenue from their voice-over-Internet protocol and subscription music business to decline.

I am still not sure why Carol took this job. By her own admission, she realizes that Yahoo! has a very “complex organization” which makes it difficult for people to make speedy decisions. Through her experience at previous jobs, one can assume that she may be able to fix this issue and get the organization back on track. But it is too early to tell if Carol has a definite plan in place for fixing Yahoo!’s strategic problems and resolving its identity crisis.

She did not make any definitive statement on whether or not the company wanted to sell their entire business to Microsoft and is in fact downplaying the Microsoft deal, which in my opinion is the right instinct. However, there has been talk of Yahoo! getting out of their search business. Apparently, talks with Microsoft have resumed on the latter, but I think it would be a mistake for Microsoft to acquire Yahoo!’s horizontal search business. The Yahoo! asset is valuable if one can monetize the vertical businesses and use personalization to get to Web 3.0. It is not horizontal search that makes Yahoo! interesting. The turnaround formula is there; Yahoo! just needs to implement it.

The stock rose more than 5% to $11.93 in after-hours trading before closing at $11.34 with a market cap of $16.62 billion, having recovered since its 5-year low of $8.94 in November of last year. We’ve just covered Microsoft, and their market cap has dwindled severely as well. The likelihood of a Yahoo!-Microsoft partial or complete marriage seems smaller right now.

In her evaluation of options, Carol Bartz must look for a strategy to build on an independent Yahoo!.

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