The Chain Reaction That May Just Save Yahoo!

As Marissa Mayer begins her sophomore year with Yahoo! (NASDAQ: YHOO  ) it's worth looking back at what she's done and where she's trying to go. And while there is plenty of work to be done, it's a certain chain reaction that makes this turnaround situation look like it may actually be turning around. Just look at what the stock has done over the past year:

YHOO data by YCharts.

Four links to success
Mayer has mentioned this certain chain reaction before. By hiring and keeping a great team, Yahoo! will develop the products that will grow users and therefore traffic, which will bring in more advertising dollars and ultimately grow revenue for the company. As Mayer succinctly put in the earnings call, "People, then products, then traffic, then revenue." Bring it all down to the bottom line and shareholders should be a happy bunch.

Be a people person
People come first and Mayer has made it very clear that the culture within the company is integral to its success. If people aren't passionate about what they're doing and where they're doing it, then the business simply can't prosper. And there seems to be something happening on Yahoo!'s campus. Attrition is down 59% over the same quarter last year, and with more than 800 employee-driven initiatives undertaken over the past year, it appears Yahoo!'s employees are at least feeling like they're part of something bigger.

No product, no Yahoo!
Products beget traffic; it can be no other way. The Yahoo! that existed 15 years ago would not survive in today's mobile world. So it makes sense that Yahoo! has grown its mobile team sixfold over the past year. What was a team of dozens is now a team of hundreds and new products are rolling out. Weather, Mail and the new Yahoo! app integrating Summly are all examples of what Mayer has made very clear: "Yahoo!'s future is mobile. And we're delivering our products mobile-first." 

Traffic jammin'
So is traffic actually improving at Yahoo? Well, there's definitely something going on. According to comScore's ranking of the top 50 U.S. Web properties for May 2012, Yahoo! sites held the No. 2 spot with more than 167 million unique visitors. One year later, Yahoo! sites again held the No. 2 spot with more than 190 million unique visitors, and this doesn't include the more than 36 million unique visitors that Tumblr generated as well. To put these numbers in context, Google sites ranked No. 1 with more than 193 million unique visitors, and Facebook was No. 4 with a bit more than 144 million unique visitors. Translation: Yahoo! is still very relevant indeed, and it appears that traffic is growing.

Revenue in the right place
It's crucial that Mayer keeps her priorities in order, and it's nice to see that she has revenue in the right place. The first three links in this chain reaction make the fourth link possible -- not the other way around. It's a strategy very much like LinkedIn's, where talent, technology and product result in monetization. But with just one year in, Mayer is still very early in this game. The results are not going to be immediate; it will take some time and she needs to address the fast-changing search landscape. While the number of paid clicks is rising, the amount Yahoo! is generating per click is falling. This quarter alone the number of global search paid clicks rose 21%, however the price-per-click (what Yahoo! makes) fell 8%. Global display also saw some challenges, with the number of ads sold down 2% and price-per-ad down 12%.

At the end of the day, Yahoo!'s business model is based on advertising. In fact, in 2012 81% of the company's total revenue came from search and display ads. This no doubt is playing into Mayer's strategy of acquiring additional businesses to get more eyeballs and more clicks. In all, since she joined the company she's spearheaded 17 acquisitions, with Tumblr being the biggest of them all. The strategy is simple: Build out Yahoo's world of offerings. The more people in Yahoo's world, the more reasons advertisers have to give Yahoo! their money.

Searching for a bottom line
Only time will tell whether Marissa Mayer truly has turned Yahoo!'s ship turned around. But it was one heck of a freshman year, and I like the way she's thinking. Yahoo! was a company in dire need of a cultural shift (among other things), and she has certainly done that. When it's all said and done, the numbers will tell the story. Here's to a prosperous sophomore campaign for Mayer and the entire Yahoo! team.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies like Yahoo!. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.

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