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More of a yelp than a Yahoo

It was another story of flat revenues for Yahoo as it released its Q1 results earlier today.

Revenue was down 6 per cent for the period at $1.14 billion, with revenue excluding traffic acquisition costs flat at $1.07 billion, resulting in flat EBITDA for the first quarter of $386 million.

For Yahoo it demonstrates another quarter where performance stood still, causing the distance between the Sunnyvale internet staple and its rivals Google and Facebook to continue to grow. While Google is seeing in excess of 20 per cent annual revenue growth and Facebook above 30 per cent, Yahoo has been at more or less the same place revenue-wise for the past three years.

The most dramatic change since the same period last year is the amount of full time employees sitting on Yahoo’s books.  At the end of the 2012 first quarter Yahoo had 14,000 employees globally, at the end of March 2013 this number was down 19 per cent to 11,300. This reduced headcount has played a large role in Yahoo reporting flat revenue but seeing a 36 per cent rise in net earnings. As a result, earnings per share increased which has managed to keep Wall Street happy for the time being.

However, at some point chief executive Marissa Mayer is going to need to demonstrate her team’s ability to not only cut employee overhead, but to take steps to increase revenue coming through the door. The acquisition of Summly in March may have helped Yahoo generate some valuable PR, but it is unlikely to play a meaningful role in moving the needle on revenue in the immediate to mid-term. The rumoured Dailymotion acquisition does have the potential to add immediate revenue, yet reports are Mayer has cooled on the idea and it is stuck in MA limbo.

Another challenge Mayer faces is generating better revenue extraction out of markets outside of North America. In the first quarter 75 per cent of its revenue came from North America, with revenue for the territory up 7 per cent year-on-year. For the same period, revenue from Asia and Australia was down 5 per cent. Europe, the Middle East and Africa was also down 6 per cent for the same period. One of Yahoo’s historical strong points has been its global footprint, and this drop in revenue in these key regions would be a concern.

The big red flag is the drop in display advertising revenue, which fell 11 per cent in the 2013 first quarter following a 4 per cent drop in the 2012 first quarter. For all the talk of Yahoo being a bit player in search due to the dominance of Google, the reality is that search is now the largest contributor of revenue to Yahoo. This perfectly demonstrates the conundrum of web advertising – being a tier one player in the area of display advertising is generally less viable and profitable than being a tier two in the world of search engine marketing.

Guidance provided by the company predicts a similar tale for the second quarter – flat revenue and a slight dip in EBITDA. The markets response was relatively lethargic, shares closing at $23.79 down less than 1 per cent. In after hours trading the stock is currently trading down 4 per cent as at 1030 AEST. There no doubt there has to be some pressure on Mayer to give the market clearer insight on her strategy to improve Yahoo’s fortunes and, in particular, reverse the significant drop in display advertising revenue. A 10 per cent dip in display advertising is a figure we are more familiar with seeing on the earnings report of a declining print media company, not an internet one less than 20 years old.  The challenges in the advertising market suggest that Yahoo perhaps needs to look at diversifying its revenue generating activities beyond advertising and looking at alternative ways to monetise its hundreds of millions of users.

Mayer talked a good game on the earnings call – claiming better engagement with staff, improvements to site aesthetics and user experience and improved efforts to recruit strong engineering talent into the company – yet the jury remains out on what improvements these are having on the trading performance of the company.

Ben Shepherd is a media and technology consultant. He blogs at Talking Digital, can be found on Twitter @shepherd and LinkedIn http://linkedin.com/in/shepherdieu

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