Mixed Outlook: What Should Yahoo! Do?

Here’s a lengthy post I put together over at SEL that goes through the earnings release and related announcements, including the 1,000 layoffs:

Despite the hopes of many and rumors that Yahoo would post “strong” earnings, Q4 2007 results (.pdf) were mixed and net income was down from a year ago. In addition, CEO Jerry Yang said the company faced “headwinds” in 2008 and offered weak guidance but promised a return to growth in 2009. Investors were unhappy and stock was down at one point 10 percent in after-hours trading (this morning it has recovered).

Here’s my “editorial” view:

Some articles this morning are highly critical of the company arguing that the layoffs offer cost savings but not much more and that Yahoo hasn’t really articulated a vision or offered products that will enable it to regain momentum. Mobile is an area of strength for the company but not yet a meaningful revenue producer.

There may well be a distorting disconnect between the Silicon Valley culture of “buzz” and novelty vs. the larger society, which is interested in utilitarian products and services that meet ordinary and practical needs. Yahoo should avoid worrying about keeping up with the Twitters and instead focus on building products that help people accomplish practical and immediate objectives in their daily lives. This still includes mobile and social media but not necessarily things like “Yahoo Live.” In addition, Yahoo appears to be dropping the ball in local, which has historically been an industry-leading product.

It’s easy for me (and others) to sit back and critique Yahoo! But in making this last set of statements I’m trying a bit more to put myself in Jerry Yang’s shoes. Yahoo! does need one or two “sexy” new products to get the press interested but I think there’s a majority audience for whom Yahoo! could be the most vital and complete site on the Internet.

Yahoo! isn’t going to gain much on Google in search in the near future. But it has to continue to invest in search for many reasons. I think that Yahoo! should make its home page more customizable — more like My Yahoo! — for users who want to take advantage of that option. And mobile is an area it can leverage to strengthen brand loyalty. Yahoo is actually ahead of Google in mobile in many respects, but the Google brand right now has greater strength among power users and early adopters.

As people become more and more overwhelmed with information, Yahoo! is in a strong position to be a leading “trusted content” source for most users. But it does still need a “social center” to pull together some of its disparate properties and content assets. That could potentially be done through a revamping of Yahoo! Groups, through personalization (including the My Yahoo-ification of the home page) and mail (as is being contemplated).

Yahoo! has set expectations now that 2008 will be a mixed year but 2009 will represent a return to strong growth. I think AT&T is the buyer or a major investor if Yang & Co. fail to execute. By the same token executing in a relatively mature company of 14,000 people is tough. But if IBM and Kodak can turn around, so can Yahoo!

What would you do?

Yahoo! Results: Modest Growth, Operating Income Down

Here’s the release (pdf). Highlights:

Second Quarter 2007 Financial Results

• Revenues were $1,698 million for the second quarter of 2007, an 8 percent increase compared to $1,576 million for the same period of 2006.
• Marketing services revenues were $1,486 million for the second quarter of 2007, a 7 percent increase compared to $1,386 million for the same period of 2006.
• Marketing services revenues from Owned and Operated sites were $887 million for the second quarter of 2007, an 18 percent increase compared to $752 million for the same period of 2006.
• Marketing services revenues from Affiliate sites were $599 million for the second quarter of 2007, a 5 percent decrease compared to $634 million for the same period of 2006.
• Fees revenues were $212 million for the second quarter of 2007, a 12 percent increase compared to $190 million for the same period of 2006.
• Revenues excluding traffic acquisition costs (“TAC”) were $1,244 million for the second quarter of 2007, an 11 percent increase compared to $1,123 million for the same period of 2006.
• Gross profit for the second quarter of 2007 was $1,015 million, a 9 percent increase compared to $930 million for the same period of 2006.
• Operating income for the second quarter of 2007 was $185 million, a 19 percent decrease compared to $230 million for the same period of 2006.

Segment Financial Results

• United States segment revenues for the second quarter of 2007 were $1,119 million, a 5 percent increase compared to $1,070 million for the same period of 2006.
• International segment revenues for the second quarter of 2007 were $579 million, a 15 percent increase compared to $506 million for the same period of 2006.

Cash Flow Information

Free cash flow was $328 million for the second quarter of 2007 compared to $358 million for the same period of 2006.

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I’ve provided some additional detail as well as some of the details of the earnings call in my SEL post. Here’s the WSJ (sub req’d) article.

Yahoo! Earnings Today, Google’s Thursday

Yahoo! announces earnings today at 5 Eastern, 2 Pacific. Flat is the expectation. We’ll see. Yahoo! has only a handful of quarters to show gains and positive momentum before anxious investors start calling for M&A. Google’s earnings will come on Thursday at 4:30 Eastern, 1:30 Pacific.

Kara Swisher makes the somewhat ironic and probably correct observation that a mediocre performance by Yahoo! won’t necessarily affect the stock and a strong performance by Google may also not impact its shares.