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Yahoo! Beating A Path To Nowhere

Posted on Thursday, Jan 28th 2010

In an earlier post, I had discussed how Google is maintaining its search leadership and how Microsoft, thanks to Bing, is gaining some ground at Yahoo!’s expense. Yahoo! has been steadily losing its share of the global search market, which is now at 17.3%. To try to gain lost ground, Yahoo! finalized and executed a definitive search and advertising services and sales agreement and a licensing agreement with Microsoft in early December. But this is too little, too late in the day. Let’s look at Yahoo!’s financial results for fourth quarter ended December 31, 2009, to see how the company performed.

Yahoo! (NASDAQ:YHOO) reported its fourth quarter 2009 results on January 26. Revenues of $1,732 million, including traffic acquisition costs (TAC) in Q409, were down 4% from Q408 and up 10% over Q309. Income from operations in Q409 was $119 million, compared to a loss of $278 million in Q408. Net income per diluted share in Q409 was $0.11, compared to Q408, net loss per diluted share of $0.22. Looks like some janitorial work has been done at the company by Madam Bartz. Great!

Marketing services revenues from owned and operated sites were $971 million in Q409, a 9% decrease compared to $1,063 million in Q408 and a 14% increase from $851 million in Q309. The decrease in Q409 compared to Q408 was primarily driven by a 15% decline in search advertising revenue and a 1% decline in display advertising revenue. Marketing services revenues from affiliate sites were $564 million in Q409, a 6% increase compared to $531 million in Q408, and a 7% increase from $526 million in Q309. In Q409, fees revenues declined 7% to $197 million, compared to $212 million in Q408, and decreased 1% from $198 million in Q309.

Demand for premium display advertising improved significantly, and Owned & Operated search advertising revenues increased sequentially for the first time since Q308. In Q409, marketing services revenues declined 4% to $1,535 million compared to $1,594 million in Q408 and increased 11% compared to $1,377 million in Q309.

As just mentioned, Owned & Operated search advertising revenues continued to stabilize, increasing 4% to $370 million in Q409 from $354 million in Q309 and declining 15% from $436 million in Q408. Owned & Operated display advertising revenues were flat in Q409 at $98 million compared to $98 million in Q309 and down 18% from $120 million in Q408. Affiliate revenues grew 7% to $564 million in Q409 from $526 million in Q309 and up 6% from $531million in Q408. Owned & Operated listings and other marketing services revenues grew 26% in Q409 to $503 million from $399 million in Q309 and down 1% from $506 million in Q408.

TAC as a percentage of revenues was 27% in Q409, compared to 24% in Q408 and 28% in Q309. Revenues excluding TAC were $1,258 million in Q409, down 8% from $1,375 million in Q408 and up 11% from $1,131 million in Q309. Ex-TAC revenues from the United States were $927 million in Q409, an 11% decrease compared to $1,047 million in Q408 and an increase of 9% from $849 million in Q309. Ex-TAC international revenues were $332 million in Q409, a 1% increase compared to $328 million in Q408 and an increase of 17% from $283 million in Q309.

In December, as a part of its Open Strategy, Yahoo! extended its integration with Facebook to provide users with a better social experience. The integration will enable Yahoo! users to connect with Facebook friends on Yahoo!, view a feed of their friends’ related activity on Yahoo!, and share content, such as photos from Flickr or comments on news stories, with all of their friends on Facebook. Yahoo! is trying to be an aggregator of key sites for its users. TechCrunch reports that Yahoo! has signed a similar deal with Friendster. Yahoo! plans to make many such deals in 2010 as it integrates both its own and external properties into a common platform that it hopes will enable it to emerge as a mega social aggregator.

The company has formed a partnership with Emmy- and Golden Globe-winning producer Ben Silverman’s newly formed content studio Electus to produce original programming for Yahoo! and provide advertisers new opportunities to integrate their brand messages into the online programming.

The company also launched the Yahoo Ad Interest Manager, which provides significantly greater control over users’ interactions with interest-based advertising to make ads more relevant to individual users and, it is hoped, build trust.

Yahoo! recently announced the closure of Shopping API, an open source project that allowed developers to improve the experience of Yahoo! Shopping customers. Yahoo! now intends to use PriceGrabber to power Yahoo! Shopping. The company has been steadily closing websites and projects that it feels are no longer viable. There are rumors that Yahoo! will shut down MyBlogLog next. The company had paid $10 million for MyBlogLog in 2007. More janitorial work continues for Carol Bartz, more cleaning up of her predecessors’ messy mistakes.

Revenues in Q110 are expected to be in the range of $1,575 million to $1,675 million. Income from operations in Q110 is expected to be in the range of $90 million to $110 million.

Yahoo! is trying to focus on a few core properties that drive end user engagement and provide better monetization through advertisers. It has accepted the fact that it cannot develop a social platform like Facebook, so the company has decided that the next best thing to do is to aggregate a large number of key social networks and integrate them with its own websites so that users can access them through Yahoo!’s homepage or through their mail, and in the process increase socialization through Yahoo! sites and improve click-through rates, thus providing better and more targeted monetization. I am not at all sure this is a strategy.

Yahoo! may have recorded good growth sequentially, but the results are down compared to Q408, and we have to keep in mind that the fourth quarter is a seasonally strong quarter compared to the third for Internet companies due to higher advertising during the holiday season. I am thus not very impressed with the Yahoo!’s Q409 performance. I have serious worries for Yahoo!, as it seems totally lost.


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