Parsing Yahoo!'s Fourth Quarter and its Future

Last week’s Q4 earnings from Yahoo! were overshadowed (initially at least) by the market’s excitement over a moving up of the full US launch of Panama. The sooner the launch, the sooner Yahoo! can close the profit optimization gap in search with Google, market observers figure.

As Mark Gongloff has said, this move-up announcement to placate dissatisfied investors has been used by Terry Semel before – most recently last Fall during the Q3 earnings call. But the announcement belies some disappointments in (what Anderson Cooper refers to as) the “raw data” of the quarter.

As Henry Blodget pointed out, Yahoo!’s growth is slowing. It was up 15% overall and only 8% in the US. Tomorrow, we’ll be able to truly compare the health of that pace relative to Google. Yahoo! has a preeminent position in the Internet (as management is eager to tell us), but slowing growth and a dearth of new ideas to capitalize on bringing in new users/viewers.

Yahoo! management’s biggest response to this criticism is that “Panama is coming, Panama is coming.” Yet, Panama is not the cavalry and will not solely save this company or its investors. Even if Panama works as planned and if the transition goes seamlessly (2 big ifs; Kevin Delaney had some news of the transition and other info came yesterday), Panama will – at best – help Yahoo be a stronger #2 to GOOG. The market doesn’t reward strong #2s; they reward market niche dominance.

(And, it's interesting to note, as 24/7 Wall Street did, that YHOO's short interest swelled 6MM to 84.1MM shares in January. Google's current short interest is 6MM shares.)

How is Yahoo! going to be preeminent in non-search? That’s the clear strategic question facing this company.

Yahoo needs to make as much money for its shareholders as possible, and Panama is the best hope the company has for closing the profit chasm relative to Google, so let’s all hope it works, but delivering Panama on time is not a strategy.

What is Yahoo!’s strategy? According to Terry Semel during last week’s conference call, Yahoo! has a “clear strategy.” It is to capitalize on the growth of the Internet with a premier advertising network. Those are my words - not his. I had to piece together several different sentences from Terry during the call to make that sentence (not a good sign of a “clear strategy”).

Terry seems intent on communicating to the market that Yahoo! has a strategy. To do this, he puts out 3 components that he would like the market and shareholders to measure him and the company on: (1) how well it’s monetizing search, (2) how well it’s doing at display/graphical ads, and (3) how well Yahoo! is growing in new “Growth Areas” (i.e., social media, video, and mobile).

Also this week, in response to a Red Herring reporter’s question about “Plan B,” a Yahoo! spokesman held up their acquisitions of Bix.com and MyBloglog, and partnerships with eBay, Vodafone, and a newspaper consortium as evidence of a “clear strategy.”

(God help all Yahoo! shareholders if Bix.com and MyBloglog are going to save the company. I love MyBloglog but how does a $10MM tuck-in acquisition help move the needle for a $40B company?)

Yahoo! is a destination first and foremost. You can search there too, but it is a place to connect with others. It is a powerful channel for information/ entertainment/ communications with an advertising network paying for it.

Terry’s (and this also goes for most of the business media covering Yahoo! of late) single-minded focus on Panama as the cure-all for Yahoo!’s problems overlooks one important fact: Yahoo!’s content has become less interesting for the Yahoo! user and non-user. Users/viewers are simply going elsewhere for their information/ entertainment/ communications needs. Also curious is that how the December 5th reorg, designed to help Yahoo! be closer to the customer according to Terry, at the moment, has no one at Yahoo! is in charge of making this area (i.e., Audience) better.

There are three legs to Yahoo’s stool as a business: (1) the users/viewers who come there to get information/ entertainment/ communication, (2) advertisers who pay Yahoo! to market to those users/viewers, and (3) the technology that underlies it.

All three areas need improvement. Yet, you only hear discussion by management and analysts of the 2nd leg of the stool. Panama is important. It will help Yahoo! “catch up” (at best) to Google. It is unlikely to surpass Google with Panama.

Most distressing to investors is leg #1. Without #1, Panama could be the greatest advertising search system in the world and it wouldn’t matter. Yahoo!’s growth in users is slowing. Google is growing its users faster. We’ll find out how much later tomorrow.

Why are users going to Yahoo! less? Why do people watch NBC less on Thursdays today compared to 5 years ago? There are more interesting options elsewhere. Yahoo!’s response to this problem to date has been to refresh the home page and it recently trumpeted an update to Yahoo! Finance. Hardly a fix or a “clear strategy” to solve this problem. Yahoo! has also said it will dominate social media, video, and mobile as a fix here (which presumably means a lot more Bix- and MyBloglog-type acquisitions to come). However, “letting a thousand flowers bloom” is again not a strategy and is an MO which led to the Peanut Butter Manifesto last Fall.

On the Technology front, it remained untouched in the last reorg. As Valleywag pointed out, some current employees from this group believe that there are significant issues to be addressed here. I have spoken to former Yahoo! employees who defend Zod Nazem and believe he brings a lot of strengths to the group, but they acknowledge that improvements are needed here. Some discussion by management on this issue is warranted.

Yahoo! shareholders deserve a clearer strategy for strengthening its 3 legs of the stool. This is why I and several others back a “Plan B” for Yahoo! which, among other steps, includes making several changes to the composition of the board (because, after all, the board has tacitly accepted the status quo for two years of market under-performance) and setting up a special committee of the board to examine and articulate a clear strategy for Yahoo! to dominate its lead in non-search as a premier Internet destination.

The stakes are high. We all know the Internet moves at light-speed. Without moving quickly to address these issues, Yahoo! risks relegating itself to a Lycos-, Excite-, and AltaVista-like fate: being ignominiously acquired at scrap-heap prices instead of driving its future and forcing others to play catch-up (as it always has during the bulk of its history).

I don’t “bleed purple and yellow,” but I love this company and ask fellow Yahoo! shareholders to sign-up and support “Plan B” in order to improve future quarterly results. We see as recently as this morning (with Carl Ichan’s involvement in Motorola) that when shareholders get active and demand answers from boards and management they are rewarded with better performance. Get involved with "Plan B" for the betterment of Yahoo! and its shareholders.

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