Yahoo Q2: Not All Bad

Everyone has focused on the negatives, so I'll hit some positives. Yahoo is clearly in trouble, however, so don't mistake these comments for rosy-eyed optimism.  The next year will determine whether the company restores what was once the dominant global Internet franchise to glory--or becomes one of the industry's biggest disappointments.  And, this time, if it stumbles down the latter route, it won't have a global advertising downturn to blame.

Positives:

• We did not have to hear Terry tell us that Yahoo had a great quarter, is outgrowing the market, and is in fantastic shape--and wonder whether he had ever set foot in the place.
• Jerry and Sue appear to understand the magnitude of the problem (competition, morale, talent, buzz, bureaucracy).
• Despite lagging the market, the company is still highly profitable: $1.5 billion free cash flow run-rate.
• Panama is working.  Revenue per search is up 15%-20% year-over-year.  This is crucial, as search is still the industry's largest and most profitable revenue stream.  Alas, the counter problem is that Yahoo appears to be continuing to lose search query share to Google (and in the latest month, god forbid, Microsoft).  With fewer search queries, improving RPS won't make a lick of difference.
• The user base is huge and still growing.  Yahoo now has 463 million users, up 13% year over year (and 17 million paying subscribers, up 18%).  Even if all else falls to pieces, this one metric represents enormous potential value.  The moment Yahoo's user base stops growing, the company is done.
• Revenue is, indeed, accelerating.  The most profitable revenue stream, search and display on Yahoo's proprietary properties, is growing faster than the rest of the business and is accelerating.  And given the rate at which Yahoo is getting its clock cleaned in its global affiliate business, affiliate revenue will soon be so small as to be irrelevant.

All of which is a long winded way of saying, it ain't over yet.  But it will be soon, if Jerry and Sue don't make good use of this latest restart.

Comments

[Bruce Hamm]

Henry, you keep referencing that it will all be 'over' at Yahoo...many times...what are you specifically referring to...stock price/mkt cap...or the company...realize that the Goog comp is the toughest of comps...but do you expect the company to literally implode....for 465M people to no longer use and enjoy thoses services, etc?

What would be your equivalent peak for Google? When PPC peaks?

[David S.]

An AP article quoted Jerry Yang as saying there would be "no sacred cows" as Yahoo! Inc. decides which parts of the business should be discontinued (presumably shut down or sold) so the company can improve its focus and earnings growth.

Well, the US financial press did not seem to pick up on it when back in April, Y! Inc. agreed to sell a very profitable business unit, Overture Japan, to Japanese JV partner Yahoo Japan (in which Y! Inc has 34% stake). Here's a link from the English version of Yahoo Japan's IR site:
http://ir.yahoo.co.jp/en/release/20070424/index2.html

Obviously this was decided while Terry Semel was CEO, but I really have to question the logic behind such a decision. It also seems that Y! Inc has not been forthcoming in sharing this information with shareholders.

A quick review of Yahoo! and Overture:
A substantial portion of Yahoo!'s revenue comes its paid search business, what used be Overture - now called Yahoo! Search Marketing, though in some foreign markets the business is still called "Overture." While Yahoo Japan is a joint venture between Japan's Softbank Corp and Yahoo! Inc, when Y! Inc acquired Overture, Overture Japan became a fully owned subsidiary of Y! Inc.
So all of the revenue from this highly profitable business unit went straight to Y! Inc. Now that they've agreed to sell it, they will only get 34% of this revenue, and that is only after it makes its way thru Yahoo Japan's P&L.

Japan was also a market (big market) where Y! was beating Google due to Yahoo Japan's position as the search engine of choice among Japanese internet users, and Overture Japan's equally strong position in paid search in Japan.
I really have to question the logic behind selling off this business unit and its steady source of revenue (especially while the company clings other units, like the Yahoo! Media Group). It just seems to make no sense.

[Royal]

Nice piece... I laughed out loud on your first bullet point... way to call a spade a spade.

Speaking of Semel, interesting that G&A related Stock Based Compensation Expense plummeted from $23.5m to $9.9m this quarter.

Assuming that's Semel hangover shares, that $9.9m divided by shares rounds up to 1 cent.

So -- I wonder once again -- did Semel's irresponsible comp package cause YHOO to miss beating by a penny?

If so, you just gotta wonder who on the board got YHOO into that mess... ?

[burt]

At least half of those 463 million are empty or dead accounts, or duplicate members, opened by people who need a quick free e-mail box for something. I alone have opened at least 15 of them over the years, mostly for spam avoidance or anonymity. It would be interesting to see how may are dead (i.e., could be defined as no activity for >6 months) or are duplicate (which could be gathed from IP address analysis). My guess is that Yahoo has 40-60 million active members in the US across all relevant age groups 10-70 years old (only 19% of US is between 20 and 40, or about 60 million, times a generous 40% = 24 million for the 20-40 bracket). Scale it up for other major countries and I estimate 150-250 million active, non-duplicated total members, or about half or less of 463 million.

[Josh McHugh]

Burt - great call. I have opened several Y accounts over the years, and later forgot the password after not using the account for extended periods of time.

Only in the last two years (thanks to fantasy football, of all things) has Y! made it worth my while to actually tie my various Yahoo activities back into that one account.

The thing here is that Yahoo knows darn well which accounts are active and which are not, but they dare not reveal that number, of course. There should be either some kind of grand coming-clean where y, goog et al. clear our their dead wood at the same time and declare their real user numbers, or there should be an audit, like they have for determining numbers of magazine subscribers.

I should know this, but has Gartner or Forrester or Jupiter made a run at doing that math? (Nothing against your excellent back-of-the-envelope work, Burt.)

[Ex-Yahoo emp]

Yahoo counts only the active users when it reports the unique user counts. It has a way of estimating how many users use multiple accounts and so I doubt if their numbers are inflated.

[Mike Briggs]

Was just checking my data for UK campaigns for Yahoo and I havent seen a significant decline of any note, on some traffic and impressions went up in last quarter - but I think that could be a seasonal thing. Could also be the fact that very few people use yahoo in the UK. Nice article