Like a Spinal Tap amplifier, Stock Advisor pick Yahoo!
So, sure, net income clocked in flat with last year's $0.11-per-share showing. There are worse things than coming in flat on the bottom line, especially when analysts were willing to settle for a profit of $0.08 a share for the period.
Yahoo! may not be growing as quickly as archrival Google
100 days of solitude
Investors weren't expecting a market-thumping surprise out of Yahoo!. Last night's conference call was supposed to be about the conclusion of CEO Jerry Yang's tough-love introspective study.
"We're changing Yahoo! from the inside out," he noted during the call, but there were no bombshells announced.
Yang didn't have to remind us that the company is de-emphasizing -- if not shuttering altogether -- non-growth areas like its music subscription service, its non-Flickr photo-sharing service, and its 360 social networking site. Those are done deals, as Yahoo! has migrated to an ad-supported music model, rallied around Flickr, and launched Yahoo! Mash, respectively.
It's putting its resources behind landing-page hubs like its home page and Yahoo! Mail, or traffic magnets like its finance, sports, and news portals. Yang didn't need 100 days to arrive at that conclusion.
However, as I noted in last month's "Great Yangini" article, investors licking their chops in anticipation of major strategic developments last night were ignoring the transformation that was taking place within those 100 days. The company's executive reshuffling and deals to acquire perfect fits like Zimbra and BlueLithium are already positioning the company to get over its stagnancy.
Addition through addition
The biggest news from Yahoo! didn't come from its actual quarterly report. It came a few minutes later, when the company announced that it had inked ad distribution deals through Cars.com, WebMD
These are juicy wins for Yahoo!. Folks looking to brush up on new cars, health care, and financial markets are great candidates to deliver lucrative leads to top-paying sponsors.
It also comes at a time when Yahoo! needed it the most. Despite the press release headline -- pitching that the company "continues building [a] network of premium publishers" -- affiliate revenue actually declined by 1% during the quarter.
Yahoo! has had a tough time growing its YPN platform to compete against the success of AdSense with small and medium publishers. We'll find out how well Google did with its third-party partners tomorrow, although it would be a shock not to see it grow nicely. (Check our Foolish Forecast on Google that reviews the company's prospects prior to the earnings release.) Yahoo! needs to beef up the recruitment of webmasters on all levels, giving them incentives to leave AdSense. Absent that kind of grassroots attack, landing a few heavies like it just did will have to do.
Follow the money
Shares traded higher on the report. Why not? It was a refreshing surprise. However, it's still troubling to see Yahoo! defy logic in certain areas. Beyond the affiliate revenue decline, here are some other things that may jump out at you within the report.
- Stateside revenue growth of 13% actually outpaced international growth of 9%.
- Monetization skills are still lacking. An internal study finds page views up by 20%, and its user base of 477 million is 14% higher than it was a year ago. Since revenue is growing slower than page views, why is Yahoo! generating less per page?
So where do the shares go from here? Yahoo! isn't happy with its margins -- and you shouldn't be, either -- as it competes against skilled margin squeezers like Google and Microsoft
There's also an appreciation opportunity within its foreign holdings. According to the company, its investments in Yahoo! Japan, Gmarket
Put all of the pieces together. When the company spits out its quarterly financials again in three months, a lot of positive things might be going on.
- A pop in Alibaba should boost the market value of the company's foreign investments.
- The integration of BlueLithium, Zimbra, and Right Media will help boost its ad revenue.
- Four beefy new partners could reverse the downward trend in affiliate revenue.
- As the second-most popular ad network in the United Kingdom, BlueLithium may help pick up international revenue.
Yes, Yahoo! can be a rock star. It can trade in its Spinal Tap amps for something better, in line with the chunkier margins and profits that Yahoo! is so capable of generating. After all, didn't Spinal Tap sing a song about big bottoms?
Some Yahoo! moves that may make you believe in magic again: