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Yahoo In Disarray, Business Declining

Posted on Thursday, Jan 26th 2012

Yahoo’s management changes continue. The company recently replaced former CEO Carol Bartz with ex-PayPal executive Scott Thompson, and a few weeks later, co-founder Jerry Yang stepped down from the board. But it is not just senior leadership that is leaving; Yahoo is also losing out on market share as they fail to match up to the might of Google and Facebook. According to eMarketer, Yahoo’s share of the online ad market fell to 11% percent last year, compared with 13.3% a year ago. During the same period, Google’s share grew to 40.8% from 38.5%, and Facebook’s share increased to 6.4% from 4.6%.

Yahoo’s Financials
Yahoo’s (NASDAQ:YHOO) Q4 revenues fell 3% over the year to $1.17 billion with display ad revenues amounting to $612 million and search revenues bringing in $465 million. EPS in the quarter fell 5% over the year to $0.24. The market was looking for revenues of $1.19 billion with EPS of $0.24 for the quarter.

They ended the year with revenues of $4.984 billion compared with $6.325 billion earned a year ago. EPS also fell from $0.90 a year ago to $0.82.

For the current quarter, Yahoo expects net revenues of $1.025 billion-$1.105 billion. The Street was looking for revenues of $1.077 billion.

Yahoo Lags in Search and Display
Yahoo is facing trouble on multiple fronts. Market share for search queries fell last month to 14.5% compared with 15.1% in November. For the first time last month, Microsoft’s Bing sneaked past them to secure the place of second-biggest search provider in the U.S.

Yahoo’s display advertising business also offered little hope. eMarketer reports that during the last quarter, U.S. market for display advertising grew 23.5% over the year to $9.2 billion. However, during the same period, Yahoo’s display revenues fell 4%, and the company is clearly struggling to compete effectively with Facebook and Google. eMarketer report estimates that display advertising market share for Facebook grew to 16.3% in 2011 compared to 12.2% a year ago, while Google’s share of grew to 9.3% from 8.6% during the same period.

They are, however, trying to improve display revenues and recently acquired Interclick for $270 million. Interclick’s proprietary advertising and technology solutions help in delivering targeted advertisements to improve customer returns. Yahoo plans to use Interclick’s data valuation platform, which is optimized to work with large data volumes across multiple providers and marketplaces, along with their data targeting capabilities and optimization technologies, to bolster falling display sales.

Yahoo’s Asia Assets
The market remained concerned about Yahoo’s plan for their Asia assets, which include a 40% stake in Alibaba and a 35% stake in Yahoo Japan. Apart from being in talks with private equity buyers for the sale of a minority stake in themselves, Yahoo has also been scouting for the sale of their Asian assets. Alibaba chief Jack Ma and Softbank have already expressed interest in buying them out. The recent hiring of Thompson followed by the unexpected exit of Yang also suggests that Yahoo may now find it easier to sell these assets. Analysts believe that Yang was an “impediment to change” and with him gone, the new CEO will have more control and be able to effect big change, especially in terms of closing out the much-awaited sale of shares in the Asian companies.

In fact, a few weeks ago, unconfirmed reports revealed that their board had decided to proceed with negotiations for an asset swap with Alibaba and Softbank. According to reports, the deal valued Yahoo’s stake in Alibaba at $12 billion and its stake in Yahoo Japan at $5 billion. Following the transaction, Yahoo is expected to retain a 15% stake in Alibaba.

Meanwhile, their stock is trading at $15.69 with a market capitalization of $19.46 billion. It touched a 52-week high of $18.84 in May 2011. Scott Thompson has his work cut out for him!

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This was coming since a long time, wasn't it? Yahoo was gradually losing share to Google across the world; be it email, search, etc. The management, by the time they awoke, found out it was quite late. A little similar to what RIM is going through now.

Vishal Thursday, January 26, 2012 at 7:49 PM PT