Yahoo: Q1 Should Be The Trough

The good news in Yahoo!'s otherwise underwhelming quarter--the single-digit revenue growth smacking more of a mature newspaper than an Internet leader--is that Q1 should be the trough.  The stock market likes acceleration, and as long as Panama continues to deliver the expected search improvements, revenue should accelerate for the balance of the year.

A few points:

• Because there was no upside in the quarter, some folks are dismissing Panama as a dud.  For two reasons, it's too early to do this: 1) the US roll-out wasn't started until the second month and wasn't completed until the end of the third, and 2) the switchover initially caused a decline in price-per-click (because search ads are now ranked on several factors instead of just price), which recovered by the end of the quarter.

• In the "Look on the bright side" department, Sue noted that, although Panama had not increased revenue per search, it had slowed its rate of decline.  Hallelujah.

• On the display advertising side, Sue's explanation for strikingly weak growth doesn't make sense to me (please feel free to explain if you understand).  She described a dynamic wherein social media, etc., is creating an explosion of low-value inventory, which is causing a decline in the company's revenue per pageview.  I understand that.  What I don't understand is why the explosion of new inventory, even new crappy inventory, is causing a slowdown in overall display revenue growth.  Is this a capacity issue?  Is Yahoo's high-quality inventory already completely sold out?  Has the growth of crappy new user-generated inventory replaced the former growth of high-quality inventory?  (I suspect the latter). Here's Sue's description, courtesy of SeekingAlpha:

There is an exciting industry-wide trend that is creating a renaissance in inventory creation in various social media products, video and mobile. Most of this new inventory is priced at lower levels than premium or reserved inventory because it is in the early days and more difficult to identify and target relevant consumers, or to guarantee placement against specific content. As this unfolds, we expect continued double digit growth in page views and modest dimunition in yield, or revenue per page view. In 2007 as this plays out, the mix shifts are likely to temper our non-search growth rates from what they were a year ago, a factor that was contemplated in the 2007 business outlook that we introduced in January.

• The "negative growth" of Yahoo Network revenue (non-Yahoo affiliate sites) was downright discouraging--down in the "mid-teens" year over year.  This is in part due to the loss of MSN, in part to due to a clean-up of the network (booting crappy affiliates) and, ominously, an increase in the amount of revenue-share Yahoo is paying to the affiliates (translation: to keep sites that might otherwise defect, Yahoo is paying them more).

Overall, it sounds as though the company is where it expected to be: poised for a year of accelerating if less-than-thrilling revenue growth.

Disclosure Reminder: I own this one.

Comments

[mb]

It is indeed ominous that TAC is increasing for Yahoo. If we don't see the same TAC increases when Google reports on Thursday, then we might be witnessing the triumph of Google's relevancy over Yahoo's dealmaking. To compete with Google, Yahoo has to share a bigger slice of the pie, since the Yahoo's pie is smaller than Google's.

As a percentage of network (non-Google sites) revenue, here's how Google's TAC rate has fared for Q!:

2004 - 81.20%
2005 - 79.06%
2006 - 77.85%

A steady decrease each year, meaning Google is sharing a smaller slice of the pie each year. This doesn't mean that Google is shafting it's partners, since the overall pie is getting larger due to superior relevance and placement.

[mb]

It is indeed ominous that TAC is increasing for Yahoo. If we don't see the same TAC increases when Google reports on Thursday, then we might be witnessing the triumph of Google's relevancy over Yahoo's dealmaking. To compete with Google, Yahoo has to share a bigger slice of the pie, since the Yahoo's pie is smaller than Google's.

As a percentage of network (non-Google sites) revenue, here's how Google's TAC rate has fared for Q!:

2004 - 81.20%
2005 - 79.06%
2006 - 77.85%

A steady decrease each year, meaning Google is giving partners a smaller slice of the pie each year and keeping more for itself. This doesn't mean that Google is shafting its partners, since the overall pie is getting larger due to superior relevance and placement.

[boo yah]

Henry,
is there any inciteful guesses you can make on google's earnings from yahoo's numbers?

or are the companies at such different places that comparisons are not as relevent now?

[ben]

one way this could be explained is if the bulk of their premium display inventory is tied to conversions rather than sold on CPM basis and that the glut of new inventory hitting the market isn't converting very well, although this would only potentially be a problem on non O&O sites if they've guaranteed a minimum cpm to the partner and now will have to pay out more but not receive more back in the form of a share of click revenue, resulting in a net slow down of growth after partner costs

[Joe Hunkins]

Henry a very nice analysis as usual. My wrong timing cost me on an options bet but I'm still a stockholder and happy to have Yahoo, even thinking of buying more as YHOO seems to have, in theory, a similar upside to GOOG at a fraction of the cost - would you agree that Yahoo and Google's prospects have a lot more in common than the capitalization differences indicate?

[P-]

Google the Great Artist. (From 'The Google Is GOD! series)

First Innovator's 2nd rule of advantages

'Is your technology Disruptive?... Is it Still?'

Even though some pundits have dismissed Yahoo's 'Panamanian efforts,' it was a clever effort none the less. My judgement is still out. I feel Panama has something substantive. The question is how much. How much of it is good and how much of it is just marketing. That's the mark of a great artist in juggling the variables in the eyes of the market notwithstanding the investment side of the equation.

Google "invest_mavin"
The World's Greatest Detective!
An Odyssesy. The Revolution!

[Royal]

Henry, looks like there was $39.4 million in G&A option related expenses.

If past awards are an indication, I think the bulk of these go to Semel.

Assuming (for sake of this observation) that they all went to him... and adding that $39.4 million back to the net income figure... and assuming the total dilution doesn't change (which of course it would but there's some round-up padding in the final number)... then I'm calculating a 13 cent gain instead of a 10 cent gain... which would have beat consensus... and possibly avoided today's blood bath.

But, I don't know if I'm actually doing this calculation correctly. And, I can't remember if companies are reporting with or without these figures these days.

So, my question: If Semel -- one individual -- not the entire rest of the company -- but just Semel -- didn't get such a big option grant, could YHOO have made its number today and potentially avoided losing about $5.4 billion in shareholder value?

Since Semel has taken out about $1/2 billion out of the company during his tenure, it's something I've wondered about for a while.

[Royal]

... whoops... forgot taxes... if you account for taxes, I think it comes in at 12 cents... still beating consensus at 11 cents... ?

[hayaletchat]

Chat-Sohbet

[batteries]

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