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CEO Switch Coming At Yahoo?

Posted on Tuesday, Oct 26th 2010

The online search market may be recording good growth, as was reported by Efficient Frontier’s estimates that Q3 paid search ad spending grew 19% over the year, making it the third consecutive quarter of double digit growth. But Yahoo! is still struggling to find the key to tapping this growth.

Yahoo!’s Financials
Yahoo!’s (NASDAQ: YHOO) revenues continued to disappoint the market. Q3 revenues grew a mere 2% over the year to $1.6 billion. Compare that with Google’s 23% revenue growth reported for the quarter. Net of acquisition costs, Yahoo! reported revenues of $1.12 billion, missing the Street’s estimates of $1.13 billion. EPS, however, was a cent higher than the market’s projected $0.15.

During the quarter, Yahoo! bought back 62 million of its shares for $868 million. Yahoo! projects revenues of $1.125 billion–$1.225 billion compared with the market’s expectations of $1.26 billion.

Yahoo!’s Search Business
According to Comscore, Yahoo!’s US search market share fell from 17.4% in August to 16.7% in September. During the same period, Google’s share grew to 66.1% from 65.4%. The drop is reflected in search revenues, where search ad revenues fell 7% in the quarter.

Yahoo! Page Views and Display Ads
Even though Yahoo! reported 17% growth in display ad revenues, the market wasn’t pleased as analysts were looking for a more than 20% growth in the segment. Meanwhile, page views fell 4% during the quarter. But falling page views haven’t shaken up Carol Bartz, who claims that user engagement will improve with the new interactive platform. The company’s recently launched Upshot blog, a blog that focuses on politics, the media, and breaking news, has generated 80 million page views in the six months since launch. Yahoo! is also working on a new Yahoo! Mail system that will integrate photos and social networking sites like Twitter.

Yahoo! is trying to increase ad revenues and recently tied up with Gannett in a local advertising partnership that enables Yahoo! advertising inventory to be a part of Gannett’s local advertising solutions on Gannett’s 81 local publishing organizations and seven broadcasting division sites.

Yahoo! Acquires Dapper
Continuing with their acquisitions, Yahoo! recently acquired Dapper, a technology platform company in the display ad creation and optimization business and a Yahoo! partner. The acquisition is expected to help drive the company’s Smart Ad revenues by helping Yahoo! deliver dynamic and personalized ads for customers across their network more efficiently.

Yahoo! and AOL Buy-Out
Meanwhile, the market is busy evaluating a potential buy-out. After all, Yahoo! still has huge potential. It is the most visited Web site in the world, with an audience of 630 million unique monthly visitors.

Recently, there were talks suggesting that AOL, along with private equity firms Silver Lake Partners and Blackstone Group LP, are looking to acquire Yahoo!. The proposed buy-out would require Yahoo! to sell off its 40% stake in Alibaba to make the deal more affordable. AOL has been on an acquisition spree of late and recently acquired TechCrunch, Engadget, Autoblog, and Joystiq to add traffic to bring in ad dollars.

If the deal were to go through, it would result in uniting the country’s two biggest display advertising players in a market where Google isn’t as big. A September report by comScore for the U.S. market pegged Yahoo!’s display advertising to reach 85.9% of the U.S. audience, followed by AOL’s 85.7% reach. Google came in third at 82.7% market reach. According to the Interactive Advertising Bureau, worldwide display advertising revenues amounted to $4.4 billion in the first six months of the current year and grew 16% over the year. The numbers are still significantly less than the $5.7 billion earned by search ad revenues in the period.

As of now Yahoo! isn’t talking about the deal. But, the way they are performing, it won’t be long before they do. Carol Bartz claims that the company needs to first walk, then run before it can fly, and she estimates it to be another couple of years before Yahoo! can reach those heights. Meanwhile, competitors are gaining ground with transactions like Google making a $700 million acquisition of ITA Software to verticalize their approach to the Web. All this while, Yahoo! is buying smaller pieces that add to their platform and technology, but don’t do anything to the entire verticalized Web 3.0 requirement.

Yahoo! senior management is already fleeing. Americas EVP Hilary Schneider, SVP of audience, mobile, and local David Ko, and Yahoo Media head Jimmy Pitaro are a few who have left Yahoo!, and Bartz dismissed the turnover as a “byproduct of change“. Well, maybe it is time that Yahoo!’s CEO changed, too. I agree with the analysis on Fortune that Yahoo! is limping to its death and [has] a mouthy CEO with misplaced instincts for the Internet business. Her contract expires in two years, and we hope the Yahoo! board doesn’t take that long to let her run this former Internet jewel to the ground.

Yahoo’s stock is currently trading at $16.34 with a market capitalization of $22 billion. It had touched a 52-week low of $12.94 in August of this year.

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