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| Yahoo! 1Q08 Results: Turn-Around Efforts Fail to Show Effect by Karsten Weide, IDC On April 22, 2008, Yahoo! Inc. announced its 1Q2008 financial results. After the third quarter under the reigns of new/old CEO and co-founder Jerry Yang, Yahoo!'s efforts to turn itself around still fail to show an effect. This does not mean that the company's efforts to clean up its act are ineffective. In fact, many of them show promise. But it does mean that these efforts need more time to gain traction. Yet time is what Yahoo! does not have, given Microsoft's attempt to acquire it. Ultimately, Yahoo!'s institutional stockholders will decide whether the company will be sold to Microsoft, and results that do not show progress do not support the company's case that it is more worthwhile in the long run for shareholders to stick with an independent Yahoo!. Let us first of all look at the overall results. Yahoo!'s gross revenue grew 9% to $1.818 billion in 1Q08 from $1.672 billion in 1Q2007 while operating income decreased by 28% to $121 million from $169 million. While the decreasing profit is less of a concern – it simply reflects that Yahoo! is investing into new technology, restructuring efforts, and severance packages for laid-off employees – the fact that revenue growth does still not significantly accelerate is problematic. In the past four quarters, revenue growth was between 7% and 12%, and Q1's 9% came in at the lower end of that spectrum. For comparison, Google's revenue grew by 46% in the last quarter. All in all, this means that Yahoo!'s restructuring efforts do not yet pay off. Of particular concern is Yahoo!'s international business. Yahoo!'s domestic sales grew by 19% to $1.307 billion in 1Q08 from $1.101 billion in 1Q07, but the international business shrank by 11% to $0.510 million from $0.574 billion. The U.S. market is relatively mature compared to the international markets (apart from western Europe), especially the countries in central and eastern Europe and in the APAC region. It is these markets that have the greatest growth potential, therefore the international business should show the fastest growth. Yet for Yahoo!, international revenue growth rates, outperforming domestic growth by a factor of two to three not so long ago, have continuously declined for the past nine quarters. International absolute revenue numbers have now decreased for the second quarter in a row, and the domestic business now handily outperforms the international one. While the overseas business once stood for 33% of Yahoo!'s business, it now generates just 28% of the company's revenue. For comparison, Google now makes the majority of its money outside of the United States (51.1% in 1Q08), and the international business expands nearly twice as fast as the domestic one (53.9% vs.30.8% in 1Q08). It is unclear as to why Yahoo! loses ground abroad, but an actual revenue loss indicates there are simple operational as well as strategic issues at work that need to be addressed urgently. The picture for Yahoo!'s advertising network is hardly rosier (this is a network of third party Web sites on which Yahoo! sells and serves in-context text ads). On its own Web sites, Yahoo! managed to increase gross revenue by 18% to $966 million in 1Q08 from $820 million in 1Q07. In the network, revenue declined for at least the fourth quarter in a row, down by 7% to $606 million from $649 million in 1Q08. This happens in a market where overall traffic explodes and becomes more fragmented across an ever-growing number of Web sites. Aggregating and leveraging third-party inventory should be one of the major growth sectors of any new media company. To be fair, for Google, too, advertising on its own Web sites outgrows that on its partner sites. But the difference is that even so, Google's network still grew by 26% in 1Q08. While it's not clear why this is happening to Yahoo!, it may indicate that it is losing partners to Google's AdSense network because of network effects that work in the competitor's favor. On a positive note, Yahoo!'s e-commerce business ("fees" in Yahoo! parlance) outperformed advertising sales. Yahoo!'s "fee revenue" grew by 21% to $0.245 billion in 1Q08 from $0.212 billion in 1Q07, whereas the advertising business only expanded by 7% to $1.572 billion from $1.469 billion. However, this segment is simply to small to move the needle for Yahoo!. All of the above does not mean that Yahoo!'s strategy to bring itself back into shape is wrong. From what we have seen and heard from Yahoo!, there are several initiatives that should make a difference to its growth (opening up Yahoo! Search and the mobile platform Yahoo! Go to external developers and the new ad platform Yahoo! AMP to name the most important ones). Layoffs and streamlining operations should do their part. But all of the above takes time, perhaps a couple of years, to show results – and that is time that Yahoo! may not have. IDC expects shareholders to decide whether to accept or reject Microsoft's offer to buy out their shares by Yahoo!'s upcoming stockholder meeting in June. That means Yahoo! needs to convince them now that at least in the long term, they could make more money by holding onto their shares than by selling them. And that may be a tall order given that since last October, without Microsoft's offer on the table, their investments roughly lost half their worth, while with the offer, they would recoup the majority of those losses. Perhaps Microsoft will even sweeten its bid somewhat, even though if it does, it is simply to convince shareholders to sell, and certainly not because Yahoo!'s 1Q results were encouraging. However, there is one good thing about Yahoo!'s earnings: As was the case for Google's latest numbers, Yahoo!'s numbers also show that advertisers are not only not decreasing spending on Internet advertising facing a potential recession, they continue to grow it. And that is good news for the Internet advertising industry indeed. write your comments about the article :: © 2008 Computing News :: home page |