Yahoo!’s Strategy Makes Me Sigh

Yahoo!’s (NASDAQ:YHOO) performance finally seems to be improving, with researchers projecting overall online ad revenues to fall 2.9% this year but to grow 5.9% in 2010. Because Yahoo! is a leader in display advertising, its performance can be seen as indicative of larger market trends.

The company’s Q3 results exceeded the market’s expectations on all fronts. Revenues of $1.58 billion fell 12% over the year, and EPS of $0.15 was significantly higher than the $0.09 earned a year ago and the $0.07 expected by the market.

Revenues from online ads on Yahoo! sites fell 8% over the year, and display ad revenues grew 2% over the year. Sales of text-based search ads fell 19% over the year compared with the market’s expectations of a 15%-20% fall in the segment. However, as ad budgets gradually pick up, Yahoo! expects to see positive trends within display. Page views also grew, by 5% during the quarter.

Yahoo!’s search share seems to be dwindling despite its big search deal with Microsoft. At the same time, Google’s share of the search market has increased gradually, from 63% in January of this year to 65% in September. Yahoo!’s share has been sliding; it went from 21% in January to 19% in September. I find it amazing and annoying that the verticalization implications continue to go unnoticed by Yahoo!’s leadership.

Yahoo! also recently launched the beta release of its new home page. The page offers access to, among other features,  social networking sites, personalized news, and recommendations. Traffic to the Yahoo! homepage is said to have gone up in “double-digit percentages” since the launch. Yahoo is looking to update the page continuously based on information gathered about users. The company is hopeful that it will manage to gather data beyond geographic location, and advertisers will be able to have access to “consistent categories of age, [and] demographic spreads.”

Meanwhile, Yahoo! is also looking to improve its content. The company announced a partnership with the ad agency WPP’s GroupM Entertainment in which the two will work together to create branded ad content to be distributed by Yahoo! across its network. Yahoo! already has a few branded shows such as the Tech Ticker, which generates 450,000 streams daily. The company’s existing shows reached nearly 16.3 million unique viewers in the United States in September but contribute only 10% of video views. Yahoo! is hoping that the partnership will help to expand its market reach.

The company also announced acquisitions of Maktoob and Xoopit to expand its leadership position in communities and content. Yahoo! acquired the San Francisco-based social email company, Xoopit, for $20 million. Xoopit offers plug-ins that find photos, videos, and other files in email and allow users to share these on multiple sites.

To expand within the Arab world, Yahoo! acquired Maktoob, which describes itself as the world’s largest online Arab community. Maktoob comes with nearly 16.5 million unique users and should help Yahoo! to expand its Arabic user base through the provision of localized content. Yahoo! is looking to use the acquisition to enable its email and messenger services to become accessible in Arabic. Given that online advertising in the Arab region is growing at a pace of 35%-40% annually, Yahoo! does view the region as a critical growth area.

The company is continuing to make improvements within mobile and launched new iPhone apps: Finance, Flickr, and Fantasy Football. The reach of the company’s applications is increasing, and there are now applications on nearly 1,900 devices compared with 400 in April of this year. Within the United States, Yahoo! has 35 million users and is hopeful that U.S. revenue will grow as monetization of the business improves. Of course, monetization won’t happen authomatically, without a coherent strategy, which continues to be absent.

The company projects Q4 revenues in the range of $1.17 billion to $1.26 billion compared with the market’s expectations of $1.22 billion. They project operating income to be in the range of $0.40 billion to $0.45 billion.

Yahoo! recently sold its stake in e-marketplace Alibaba.com and recorded a significant $98 million gain on the transaction. However, the company will retain its 29% stake in the parent Alibaba group and insists on maintaining its $10.3 billion stake in Yahoo! Japan.

Yahoo! is looking to sell more of what it considers to be non-core assets such as HotJobs, Yahoo! Small Business, and Yahoo! Personals in the coming quarters. The company had acquired Hot Jobs in 2001 for nearly $435 million, and the site’s HotJob’s value lies in the traffic that it gets from the Yahoo! sites. If Yahoo! were to sell Hot Jobs, the former may be paid a big fee just to maintain the traffic flow to the site. Yahoo! is looking for strategic buyers for both HotJobs and Small Business rather than simply buyout shops. For Yahoo! Personals, though, IACI had initially expressed interest in purchasing the site to add to its Match.com asset. Analysts peg the value of Yahoo! Personals at $500 million, although the business’s financials have not been disclosed. I disagree 100% with the entire strategic direction that Yahoo! is taking. At this rate, the company should also try to sell Yahoo! Games, which boasts of more than 19.2 million unique monthly visitors, just shy of segment leader Electronic Arts’ 19.6 million.

If you recall my February 2007 piece Yahoo!’s Turnaround Formula, you will see why I disagree so strongly with the direction in which Yahoo! is going.

The stock reached a 52-week high of $18.02 early this week and has been trading at $17.66 with a market capitalization of nearly $24.8 billion.