It's now becoming clear why Yahoo! (Nasdaq: YHOO) made a last-ditch attempt to sell itself to Microsoft (Nasdaq: MSFT) at the $33 price it had once rebuffed. Despite its noble efforts in pressing on in a very difficult operating environment, last night's quarterly report indicates that it will be a long time before Yahoo! can justify the lofty valuation implied by Microsoft's offers.
Revenue before traffic acquisition costs rose by 8% to $1.346 billion during the second quarter. Operating income, free cash flow, and net income all fell during the period. Those numbers may have been partly bogged down by costs associated with analyzing and fending off Mr. Softy, but adjusted earnings still fell to $0.10 a share. Wall Street was looking for Yahoo! to post a non-GAAP profit of $0.12 a share on $1.37 billion in revenue.
The news isn't all bad. Yahoo! grew its cash balance to $3.2 billion. International revenue took an 8% hit, primarily because of changes in the Yahoo! Japan relationship, but stateside revenue actually grew by 13%.
In other words, Yahoo! is making headway that defies the single-digit top-line growth and bottom-line dive.
For now, the company's biggest weakness is the lack of growth outside its company-owned sites.
If Yahoo! ever wants to take on Google (Nasdaq: GOOG), it'll have to make it more attractive for publishers and website developers to turn to Yahoo! to monetize their websites. Yahoo!'s owned and operated sites saw a healthy 14% spike in marketing revenue during the period, whereas affiliate sites clocked in with a 4% decline. The company may have struck recent deals with Turner, CBS's (NYSE: CBS) recently acquired CNET, and Wal-Mart (NYSE: WMT), but it needs more. A lot more.
Yahoo! probably doesn't see it that way. It wouldn't even be entertaining the outsourcing of its paid-search space to Google this year -- even if it plans to focus on display advertising as a way to win over affiliate sites -- if it felt that it had a chance to become the Google AdSense of display advertising.
That's a shame, because even though Yahoo!'s conference call waxed optimistic on new initiatives like Buzz, SearchMonkey, and BOSS, you can tap the archives to find similar enthusiasm for other buzzwords like Panama and Yahoo! 360, which ultimately fell flat.
So what's it all about, Yahoo!? I can't be the only one who remembers the sting of the first-quarter layoffs, right? Yahoo! went from 14,300 employees to just 13,800 during this year's first quarter as a cost-saving move, but it's now back up to the same 14,300 it had when the year began.
Yahoo! isn't broken, but it is in a rut. Now that it's miles away from where Mr. Softy can hear it, it's going to have to climb its way out of that rut on its own.
Some other recent Microhoo dealings:
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