Yahoo! Inc. is a leading Internet brand and one of the most trafficked Internet destinations worldwide with 460 million worldwide unique visitors. About 88% of total revenues for the fiscal year 2006 came from marketing services. The largest segment of it comes from search advertising.
Of late, Yahoo’s financial performance has been mediocre compared to its peer Google because of its haphazard portal strategy, which lacks focus. Yahoo! has also suffered from the late launch of its Panama and the slow technological progress.
The Company has not been able to integrate its acquisitions well and its content and display ads are not well targeted. Management has been a mess. Strategy has been confusing. Talent has been leaving readily.
The lackluster performance in the last few quarters has seen Terry Semel out and founder, Jerry Yang, back in the CEO’s seat. Yahoo! reported decent numbers in 3Q07 by beating the street marginally. Yahoo! reported net revenues of $1,283 million, up 14% YoY and 3% Q/Q, ahead of Street estimates of $1,239 million.
The Company guided for net revenues to be in the range of $1.31 billion to $1.45 billion, slightly higher than Street expectations of $1.37 billion. Adjusted EBITDA was guided to be between $480-$550 million, lower than the Street at $531 million, representing an EBITDA margin of 37.3%.
Jerry Yang, recently did a 100 Day Strategic Review of Yahoo’s business and the key takeaways from it are:
1) Prioritize its offerings by de-emphasizing certain services (such as subscription music & Yahoo! Photos) while devoting resources to other core offerings such as Finance, Sports and News. It would also look at shutting down some services.
2) Deliver an integrated “one-stop shopping” experience for advertisers on and off the Yahoo! networks. It will also look at strategic partnership with publisher sites to increase inventory supply.
3) The Company plans to open up its platforms create a motivated community of developers.
Yahoo! wants consumers to start their Internet use every day through MyYahoo. For this it wants to provide the consumers with a key set of applications that will help them to both discover and better manage their lives. The Company is also working on its mobile applications, which is expected to emerge as a key traffic and revenue driver in the future. Local advertising is another focus area.
The International launch of Panama is ahead of its schedule and this has enabled the Company to improve its domestic O&O RPS by 20%. According to comScore, Panama has been experiencing higher click through rate. Branded advertising grew 20% YOY and Non-guaranteed Buys have almost doubled since 1Q06.
The Company needs to focus on being the market leader in multiple key verticals and either drop the slow growing ones, or make the right acquisitions. Yahoo! is the number one online destination for news, sports, and finance in terms of both audience size and engagement. It needs to develop more of its verticals as top destinations.
Yahoo! is focusing its efforts around building platforms that attract third parties and user generated content while de-emphasizing original entertainment programming. It is also looking at social networking in a big way and we could see the Company making an acquisition in this space in 2008. Yahoo’s best community effort thus far is Flickr.
Yahoo! has been focusing too much on search and trying to compete with Google in an area where they are weak and Google is by far the market leader. Yahoo! is making the mistake of trying to copy Google’s search success, instead of leveraging its strength in verticalized Web 3.0 businesses. Yahoo! will also be much better off focusing on high-end, verticalized CPM-based advertising than the CPC/search advertising. It is also a good idea to focus on diverse business models, including commerce (see the Flickr-Shutterfly discussion).
The Yahoo! stock is trading at a forward P/E of 48 at a price of around $26. I see a clear opportunity for the stock to move up to the mid-thirties or higher with a strong focus on Web 3.0 and verticalization over the next 18 months. To do so, however, Jerry Yang will need to resist spending on acquisitions like Zimbra, and instead, focus on vertical acquisitions.
Gosh! I sound like a broken record, don’t I?