By the time this article is over, you may think that I don't like Yahoo! (Nasdaq: YHOO). Let's put a stop to that idea right now. I use it and I like it fine (though I probably wouldn't pay anything for it). It is relevant and successful. It is a strong business with good cash flow characteristics. I think, however, that its high growth may be more or less permanently behind it. Here's why.

Another weak quarter
It's been almost a month since Yahoo! reported its second-quarter results. It also lowered guidance for third-quarter earnings down from $0.01 per share to break-even. Nevertheless, it seemed at first that the market was impressed with Yahoo!'s performance; its stock rose more than 9% the day after it announced results. Since then, however, other shiny objects have distracted momentum traders, and Yahoo! has slid right back down to where it was before earnings. It's back flirting with $17 a share like a high-school girl who thinks she could do better than the one pimply-faced guy left at the Snowball.

From the way I see it, though, Yahoo! ought to be happy with its $17 suitor. Pass on it, and the next gentleman caller may be $10.

Revenue growth has stopped
It's this revenue thing. Sure, sales were up about 1% sequentially, but the top line lost 33% year-over-year. The company also had a $28.4 million operating loss. What's more, for the first time in four years, the company had negative free cash flow. Yahoo! has produced only $10 million in free cash flow in the first six months of this year, compared to $214 million at this time last year.

But, hey, everyone knew this year would be bad. Yahoo! is still deeply tied to advertising, and advertising stinks these days. The conference call sought to allay those fears and provide new direction. It didn't work for me.

The call was downright painful to listen to. If you haven't yet, you may want to: a) listen to it to enjoy a good example of how NOT to communicate, or 2) replicate the experience at home -- record the phrases "key verticals," "deeper personalized services," and "leveraging core assets" on your computer and randomize playback.

If not advertising, what?
There were three specific business matters discussed in the call that bothered me:

Advertising: New CEO Terry Semel, in his first conference call for Yahoo!, repeated DoubleClick's (Nasdaq: DCLK) assertion that ad spending will not recover until mid-2002. What that means is that they have no idea when or if it will recover -- or how much lower it will go before it recovers. Yahoo! repeatedly said that its revenue now is "higher quality" than before. That is, in the words of CFO Sue Decker, there has been a "positive evolutionary change beneath the surface of our financial results."

That's probably true, since non-pure-play dot-coms are making up a larger percentage of advertising revenue, but that doesn't mean that it's growing at all. It's not. It's staying level, and no one knows when growth will return. Meanwhile, dot-com ad revenue has dropped off a cliff. More than 20% of Yahoo!'s revenue still comes from them, and it is still vulnerable.

Decker described the ad situation as less cyclical and more stable; I'd call it an outrageously great period that has passed and won't come back. Even when growth returns to advertising and Internet ads reach normalized levels, it will be at an average industry rate, with average industry cyclicality, not the constant 100% increases of the past.

Premium Services: Much was made of the fact that business and premium services revenue increased 9% sequentially in the quarter, to $33 million. Semel says that Yahoo! is "leveraging our strong core assets to develop a deeper personalized premium services in a more focused range of key vertical areas." The emphasis was on premium music and finance offerings.

I am the exact target market for both those things, and I doubt I'll get either. Premium Yahoo! Finance offers streaming real-time quotes, mobile access, and live market coverage. That's it. For that, it charges $10 per month. These are commodity products that I can get for free elsewhere, including -- at only slightly diminished quality -- at Yahoo!

Next quarter, Yahoo! will offer Duet -- whoops, sorry, it's been renamed Pressplay -- its digital music distribution venture with Sony (NYSE: SNE) and Universal, a division of Vivendi (NYSE: V). I don't see why Yahoo! will be the one to make this work. There are plenty of services available, some still free. An analyst asked in the Q&A what pricing model Yahoo! would use. Semel basically said that no one else had come forward with a model yet, so Yahoo! will wait and see what others do. That's not making the rules; that's following the crowd.

Yahoo! thinks that its unique ability to "personalize" the music experience is its competitive advantage. Personalization is nice, but it's questionable whether people will pay for more of it. Right now, it's possible to download almost any song I want for free, put it in a jukebox, and play it in any order I please. I don't need Yahoo! for this.

The company has a new deal with Sony for something else. Here's how the deal is characterized: It is a "multi-faceted agreement that leverages a wide range of assets from each company." That's clear enough, right? You can see how that will produce revenue, right? They're leveraging assets, for pity's sake! Well, in Yahoo!'s case, we're not talking about literal assets, but you know what they mean.

What is Yahoo!, anyway?: Just a moment -- do you know what they mean? I don't add all of these quotes just to be an ass. I think they are revealing. If management can't explain its initiatives and their value in clear language to investors, then they may not have a firm idea themselves. "Personalizing" is not an advantage; AOL Time Warner (NYSE: AOL) can personalize just as well, as can (Nasdaq: AMZN) or eBay (Nasdaq: EBAY). Yahoo! isn't "leveraging assets." Its users don't belong to it. Yahoo! is simply trying to make occasional viewers of one thing buyers of another. That's hard, and Yahoo! has never demonstrated the ability to do it.

The most telling line in the call came from Semel, speaking off-script at the end of the Q&A:

"The advantage or the disadvantage -- and it's not a disadvantage -- the advantage and the opportunity to Yahoo! is that we are the largest... you know... we are the largest... um... delivery system in the world."

It literally took Semel 15 seconds to say that line. (Try reading it aloud yourself, and see how long it takes.) And it's not that he's a slow speaker. He clearly had to take a moment to formulate in his mind exactly what Yahoo! is. It made me wonder: Does he know what it is? Is he uncomfortable saying what it is? And how difficult does this blurry focus make marketing? Could it have contributed to today's announced departure of long-time head of marketing Karen Edwards?

Yahoo!'s bottom line
Yahoo!'s an aggregator, and a good one. Its revenue will mainly come from advertising, not these ancillary services. It will grow at a rate similar to the ad business, once the flotsam from the century flood has cleared. Revenue seems to have bottomed, but it will be a while before there is meaningful growth. The real option value that is priced into the stock is too generous.

Brian Lund normally writes for the Rule Breaker. He is a terrible houseguest. Of the stocks mentioned, he owns eBay. To see all his holdings, look at his online profile. The Motley Fool is investors writing for investors.