No one should be surprised by Yahoo!'s (Nasdaq: YHOO ) ho-hum performance in its latest quarter.
Revenue excluding traffic acquisition costs fell 5% to $1.076 billion. Margins continued to improve as Yahoo!'s cost-shaving initiatives, Microsoft's (Nasdaq: MSFT ) reimbursements, and a lighter tax bill propped net income 11% higher to $237 million -- or $0.18 on a per-share basis.
Analysts correctly nailed Yahoo!'s bottom-line showing, but they were banking on Yahoo!'s adjusted revenue falling by only 2%.
Despite all of the moving parts at the dot-com giant in the form of divestitures on the way out and platform properties on the way in, Yahoo! is breaking a sweat but it's not getting anywhere.
Carol Bartz was named CEO on Jan. 13, 2009, when the stock closed at $12.10. It was a case of perfect timing, with Bartz hopping on just weeks before the mother of all tech rallies would begin. As an outsider, no one could blame her for the botched Microhoo buyout bid. She was the right choice at the time as a seasoned tech veteran without fear of shaking things up.
Unfortunately, there has been more baking than shaking. Shares of Yahoo! have gone on to rise 12% since here announced arrival. Larger rival Google (Nasdaq: GOOG ) has come through with a 92% surge.
Yahoo! doesn't have to be Google, and Bartz has made that perfectly clear by handing over its search business to Google rival Bing. The emphasis has been on improving margins through a leaner structure and making a splash in display advertising. Sadly, display revenue before traffic acquisition costs also declined during the quarter.
Bartz isn't necessarily on the hot seat, but her run as CEO won't last long if she doesn't get Yahoo!'s stock moving in the right direction. Let's go over three things that Bartz needs to do not only to restore confidence to Yahoo!'s shareholders but to bring swagger to the online behemoth itself.
1. Clear up the Alipay situation
Bartz claims that Yahoo! and Alibaba are making "substantial progress" on resolving the Alipay transfer issue, but what does that mean? Investors have been in an uproar over Yahoo! being cheated for more than two months -- and Yahoo! has known about this even longer.
Yahoo! needs to be satisfactorily compensated for the Alipay swindle or have its entire Alibaba stake cashed out at a reasonable price. Until Bartz can achieve either resolution, Bartz and Yahoo! appear to have been had here.
2. Go shopping
Yahoo! has nearly $3.3 billion in cash, equivalents, and marketable debt securities. This obviously isn't enough to buy into the Web 2.0 darlings. It blew its chances to snap up Facebook and Groupon earlier in their growth cycles.
Instead of using that money to try to inflate per-share profitability by buying back more stock, it needs to buy its way out of its organic growth rut.
Since it's been priced out of sexy, it may as well bulk up with content creators that generate a ton of traffic for Yahoo! to slap its ads on. AOL (NYSE: AOL ) and Demand Media (NYSE: DMD ) are trading well below their earlier highs, and their combined enterprise value is less than Yahoo!'s cash hoard. Cash-rich IAC (Nasdaq: IACI ) could be another buyout possibility, though Barry Diller's new media empire hit a new multiyear high earlier this month. In other words, there's no reason to sell itself cheap.
3. Turn display adverting around
Yahoo!'s move to outsource its paid search business -- along with last year's sale of Zimbra and HotJobs -- placed more weight on Yahoo!'s display business.
Display has never been as scintillating as paid search, but it should be a growing business given brand advertisers flocking to the growing audiences in cyberspace.
In a humbling admission, Bartz blames display's weak showing this time around on softness that Yahoo! experienced toward the end of the quarter as a result of high turnover in the company's sales force. Whether sales executives are being plucked by faster-growing dot-coms or Yahoo! is dismissing the wrong hires, it doesn't reflect well on the company. Bartz will need to earn her keep by building up both the morale and productivity of her display sales team -- and soon.
Time ticks on, and there are only so many more ho-hum quarters that investors will be willing to take.
What do you think will make Yahoo! a hot investment again? Share your thoughts in the comment box below.
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