Yahoo: Q1 Should Be The Trough

From Internet Outsider

The good news in Yahoo!’s otherwise underwhelming quarter–the single-digit revenue growth smacking more of a mature newspaper than an Internet leader–is that Q1 should be the trough.  The stock market likes acceleration, and as long as Panama continues to deliver the expected search improvements, revenue should accelerate for the balance of the year.

A few points:

• Because there was no upside in the quarter, some folks are dismissing Panama as a dud.  For two reasons, it’s too early to do this: 1) the US roll-out wasn’t started until the second month and wasn’t completed until the end of the third, and 2) the switchover initially caused a decline in price-per-click (because search ads are now ranked on several factors instead of just price), which recovered by the end of the quarter.

• In the "Look on the bright side" department, Sue noted that, although Panama had not increased revenue per search, it had slowed its rate of decline.  Hallelujah.

• On the display advertising side, Sue’s explanation for strikingly weak growth doesn’t make sense to me (please feel free to explain if you understand).  She described a dynamic wherein social media, etc., is creating an explosion of low-value inventory, which is causing a decline in the company’s revenue per pageview.  I understand that.  What I don’t understand is why the explosion of new inventory, even new crappy inventory, is causing a slowdown in overall display revenue growth.  Is this a capacity issue?  Is Yahoo’s high-quality inventory already completely sold out?  Has the growth of crappy new user-generated inventory replaced the former growth of high-quality inventory?  (I suspect the latter). Here’s Sue’s description, courtesy of SeekingAlpha:

There is an exciting industry-wide trend that is creating a renaissance in inventory creation in various social media products, video and mobile. Most of this new inventory is priced at lower levels than premium or reserved inventory because it is in the early days and more difficult to identify and target relevant consumers, or to guarantee placement against specific content. As this unfolds, we expect continued double digit growth in page views and modest dimunition in yield, or revenue per page view. In 2007 as this plays out, the mix shifts are likely to temper our non-search growth rates from what they were a year ago, a factor that was contemplated in the 2007 business outlook that we introduced in January.

• The "negative growth" of Yahoo Network revenue (non-Yahoo affiliate sites) was downright discouraging–down in the "mid-teens" year over year.  This is in part due to the loss of MSN, in part to due to a clean-up of the network (booting crappy affiliates) and, ominously, an increase in the amount of revenue-share Yahoo is paying to the affiliates (translation: to keep sites that might otherwise defect, Yahoo is paying them more).

Overall, it sounds as though the company is where it expected to be: poised for a year of accelerating if less-than-thrilling revenue growth.

Disclosure Reminder: I own this one.

Posted by Henry Blodget on April 18, 2007

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