SJ Mercury News: Yahoo: A light at end of tunnel?

From yesterday's SJ Merc News:

ANALYSTS LOOKING FOR SIGNS YANG WILL CLOSE GAP WITH GOOGLE

By Elise AckermanMercury News

Article Launched: 10/17/2007 01:36:47 AM PDT

Is the long-awaited turnaround of Yahoo finally under way?

Investors are hopeful in the wake of Jerry Yang's first full quarter as chief executive. The Sunnyvale Internet giant solidly beat Wall Street's expectations Tuesday, reporting a 12 percent rise in revenue and an acceleration of growth.

The question is whether the company's respected co-founder can continue to build momentum. Less than a year ago, the sale of Yahoo seemed imminent, with a $50 billion bid from Microsoft reportedly on the table.

But despite an almost 5 percent drop in net income compared with a year ago, Yahoo's third-quarter performance has quieted calls for its breakup.

Yahoo said its net income for the quarter ended Sept. 30 was $151 million or 11 cents a share, compared with $159 million, or 11 cents a share for the same quarter last year. Quarterly revenue rose to $1.77 billion compared with $1.58 billion last year.

Analysts surveyed by Thomson Financial had expected earnings of $117 million, or 8 cents a share, on revenue of $1.24 billion.

"It was a big step in the right direction," said Gene Munster, an analyst with Piper Jaffray. Munster noted Yahoo also reported a 14 percent increase in visitors as well as a 20 percent jump in page views.

Investors have been anxiously waiting for an improvement in Yahoo's performance since mid-June, when Yang replaced Terry Semel as chief executive. Once an Internet superstar, Yahoo steadily lost ground to Google under Semel's stewardship.

In a conference call with analysts Tuesday, Yang laid out three priorities. He said he would make Yahoo the starting point for people using the Internet and a "must buy" for advertisers.
He also is hoping that Yahoo will become the platform of choice for third-party developers who will use the company's vast data stores to create useful applications.

Yang said a lot of the internal work he had done during the past three months - including streamlining Yahoo's organization structure and elevating executives such as Hilary Schneider, the new senior vice president of Marketplaces - would not be visible to outsiders.

"The Yahoo we envision today is very different from the Yahoo of one year ago," Yang said. But he cautioned that it will take several more years before Yahoo is fully on track.

Yahoo's quarterly revenues currently are less than half of those of Google and its profits amount to less than one-fifth of Google's earnings. According to Nielsen/NetRatings, Yahoo conducted 20 percent of all U.S. searches in August, compared with almost 54 percent for Google.

Yang vowed to turn those numbers around when he stepped in as CEO. Declaring there were "no sacred cows," he immediately launched a 100-day strategic review while reshuffling the roles of top executives. Meanwhile, analysts suggested the company embrace drastic measures.

Rob Sanderson of American Technology Research said in June that the easiest way for Yahoo to create shareholder value would be to abandon search technology efforts and become a Google affiliate - in other words, let Google sell ads on Yahoo's behalf.

Jeffrey Lindsay of BernsteinResearch agreed. Earlier this month, he calculated Yahoo could be
worth as much as $45 a share if the company outsourced its search function and fired a quarter of its employees.

Tuesday, both analysts relented on their criticism. Sanderson said investors should be encouraged by the prospect of a long-awaited turnaround, but he cautioned "there is still a long way to go to narrow the gap on Google."

Lindsay questioned whether Yahoo would be able to continue to make substantial improvements in its performance. "Expectations were extremely low," he said, noting that while other measures rose, Yahoo's profitability appeared to decline.

He also wondered why Yahoo executives did not substantially increase financial guidance for the rest of the year to reflect the recent improvements and the closure of major acquisitions such as BlueLithium, a digital marketing company with a fast-growing advertising network, and Zimbra, which makes software for Web-based e-mail.

Chief Financial Officer Blake Jorgensen said Yahoo was raising its guidance for the entire year by $130 million, placing annual revenues, excluding marketing costs, in the range of $4.89 billion to $5.02 billion and operating profits in the range of $1.88 billion to $1.95 billion.

Eric Jackson, a shareholder who led the revolt against Semel, said he appreciated that Yang had under-promised and over-delivered, but said he would like Yang to make some bolder moves.
Yahoo has shut down its U.S. auctions and combined two photo-sharing services, but Yang has yet to preside over any dramatic changes.

"I'm in favor of some big job cuts," Jackson said. "I would like to see them shut down the operations in Southern California. I don't think there is any reason why Yahoo media and Yahoo finance can't run out of Sunnyvale."

Contact Elise Ackerman at eackerman@mercurynews.com or (408) 271-3774.

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