Yahoo! Inc. (NASDAQ: YHOO) reported better-than-expected revenue and earnings for its fourth quarter, but not that much better. There were some bright spots, including a jump of 14% in display ad revenue to $635 million for the quarter. The not-so-bright spots were led by a -12% drop in quarterly revenue and the announcement of additional job cuts at the company.
Yahoo’s transition to combining its search-advertising business with Microsoft Corp. (NASDAQ: MSFT) gets the blame for the revenue drop. Company executives predict that the move will save money in the long run because Yahoo will no longer have to spend money on developing new search technology.
That could be true, but there’s not much chance that it will make much difference. Search competitor Google Inc. (NASDAQ: GOOG) monopolizes the search market and its advertising networks, DoubleClick and AdMob, provide it with a revenue stream that the Yahoo/Microsoft duo has yet to develop. Yahoo did purchase a small ad platform in December, but that will take time to get integrated into the company’s offerings.
Yahoo will also face additional pressure for display ads on mobile devices from Apple Inc. (NASDAQ: AAPL) and its iAd network. The simple fact is that Yahoo is nowhere with a mobile advertising platform.
The company posted revenue of $1.53 billion in the fourth quarter and EPS of $0.24. Analysts were expecting EPS of $0.22 on revenue of $1.2 billion. A year ago the company posted revenue of $1.73 billion and EPS of $0.11.
And as much as the company touts its display advertising as the engine that will drive its top-line growth, the facts seem to indicate that Yahoo is losing its position at the top of the display advertising pack. The company’s share of display advertising fell from 16.5% in 2009 to 16.2% in 2010. Google’s share of the display ad market soared from 4.7% to 13.4%, and privately held Facebook’s display ad share rose from 7.3% to 13.6%.
When Yahoo reported its first quarter 2010 results in May, the company made a big deal of its efforts to develop an international presence with acquisitions and partnerships. The word “international” does not even appear in this earnings release except in the disclaimers.
Given Yahoo’s lack of imagination and effort in mobile advertising, it would be reasonable to assume that the company will work on expanding its margins rather than trying to grow its revenues. That would be the smart thing to do.
The difficulty is that Yahoo’s margins on display ads is shrinking. Unless the company fights aggressively, and successfully, to maintain its display ad share against Google and Facebook, Yahoo’s margins could either shrink further or stagnate.
For the current quarter, Yahoo projects revenue of $1.02-$1.08 billion, lower than analysts’ expectations of $1.13 billion. That, more than anything, has pushed the share price down about -3% this morning, to $15.56, about in the middle of the company’s 52-week range of $12.94-$19.12.
Paul Ausick
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