Shares of Yahoo (YHOO: Charts, News, Offers), the former kingpin of the Internet, plunged 7% during Wednesday trading after it missed analysts’ estimates and provided weak guidance for the third quarter. The long struggling company, which has become a marginalized by search giant Google (GOOG: Charts, News, Offers), attributed a poor showing from its core display advertising business to its weak earnings. The company reported net earnings of $237 million, a slight increase from the $213 million it posted a year ago, with revenues of $1.08 billion, a 5% decrease from the previous year. Its total revenues generously exclude the traffic acquisition costs which Yahoo has to pay sites for sending it traffic. Search revenue plunged 15% year-on-year to $371 million. Yahoo’s core display advertising business posted an anemic 2% increase over the same period last year, a big step back from the 6% growth it posted in the previous quarter.
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Yahoo’s shareholders have gotten used to the company’s terrible earnings, but the long-term picture for the company seems increasingly bleak, with the loss of its key holdings in China and the war between Facebook and Google changing the entire landscape of the Internet into an unfamiliar one which Yahoo is ill-equipped to compete in.
A closer look at the company’s display advertising business some strengths. Display revenue was flat in North America, but increased 27% in Europe, the Middle East and Africa, and 20% in the Asia-Pacific region – a mixed bag which CEO Carol Bartz calls “a mix of good, encouraging, and at the same time unsatisfactory.” Bartz stated that a restructuring of the company’s U.S. sales force, not economic malaise or competitive pressure, caused the shortfall. According to Bartz, Yahoo has been attempting to reduce its workforce into more efficient sectors with a “deeper industry focus,” investing more in streamlined sales management teams which can reach a larger number of prospective advertisers. In other words – reorganizing the workforce caused a lot more people to quit than she had anticipated.
Although Bartz has managed to keep expenses under control this quarter, she has been responsible for selling many of Yahoo’s sites, such as HotJobs, just to stay afloat. Photo-sharing site Flickr is widely rumored to be next on the auction block. Margins actually increased slightly, due to Microsoft’s revenue-sharing agreement in its search business. However, Yahoo has recently stated that it would be willing to pay up to $2 billion to acquire Hulu, provided that the deal included exclusive access to current TV shows and older movies. Yahoo could use Hulu to take on Google’s Youtube, although Youtube has hardly been Google’s most profitable business segment.
During Carol Bartz’s tenure, Yahoo Japan defected to Google and Alibaba spun of its valuable Alipay division into a new business to keep it out of Yahoo’s hands. Naturally, Bartz has claimed that negotiations with Alibaba, which it owns a 43% stake, are still active, but most analysts believe that Yahoo stands little chance to recover any stake of Alipay.
Google’s new Google+ social network has also cast serious doubts as to whether or not Yahoo can compete in the new landscape of the Internet, dominated by social media heavyweights Facebook, Twitter and LinkedIn. If Google, which also earns most of its revenue from display advertising, is so threatened by the advent of social media that it has launched its own expensive countermeasure to Facebook, how can Yahoo hope to stay afloat as the two titans carve the Internet in half with their ubiquitous +1 and Like buttons? To make things worse, China’s 800-pound gorilla of search, Baidu (BIDU: Charts, News, Offers), is quickly evolving into the new Google, and has stated its intentions to spread into other Asian markets. Microsoft (MSFT: Charts, News, Offers), which is partnered with Yahoo, is also backing Baidu. The threat of Baidu, coupled with the Yahoo Japan and Alipay debacles, may spell doom for Yahoo’s Asian businesses.
Shares of Yahoo trade with a trailing P/E of 15.98 and a price-to-book ratio of 1.53, deep discounts for an Internet stock. However, the Internet is all about high expectations, innovation and growth, which Yahoo has proven quarter upon quarter that it sorely lacks.
Other News About YHOO
Yahoo revenues slip to lowest since 2005
Yahoo disappoints again.
Revenues drop to the lowest point in six years.
Other Stocks in the News
Apple Sets Sales Records and Hits Historic Highs
Apple does it again.
Google+ iPhone app finally at Apple iOS App Store
Is Apple extending an olive branch to its rival Google?
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
