Yahoo! (YHOO) And The Miracle Of Cost Cutting

Wall St. was impressed by but not euphoric about Yahoo!’s (NASDAQ:YHOO) third quarter earnings. The company’s net revenue was $1.131 billion, down from $1.325 billion in the period last year. Net income for the quarter that ended in September was $187 million, $.13 cents a share, up from $54.3 million, or $.04 a share, a year ago.

Yahoo! made several important comments on its earnings call including that it would be retaining its interests in Yahoo! Japan and Chinese e-commerce company Alibaba. Investors have been puzzled about the strategic value of these assets because they seem to do little for the portal company’s prospects.

The press highlighted comments by Yahoo!’s CEO Carol Bartz that the firm’s “major businesses have stabilized.” That does not mean very much since that stability is at a very low level of annual revenue. Yahoo!’s new search joint venture with Microsoft (NASDAQ:MSFT) will help sales and profits, but the core of Yahoo!’s business has become stagnant.

Yahoo! is one of the many American companies that have stopped growing, or are shrinking slowly. The recession has been blamed for much of this. Yahoo! can’t use this excuse. Its products are simply not as relevant as they were five years ago. Google (NASDAQ:GOOG) is not the only cause. There are too many other web sites that do pieces of what Yahoo! does whether that is news, sports, e-mail, messaging, or employment postings. The internet is overflowing with properties that do almost all of this and in most cases do it better than Yahoo!. The company’s major businesses are simply not relevant enough to keep Yahoo! on a growth track. There is nothing unusual about Yahoo!’s revenue decline, after all Google’s revenue only grew 7% last quarter.

Carol Bartz has not proved to be as aggressive at bringing in sales as many investors would have liked in her brief period at the helm of Yahoo!. Shareholders barely gave her deal with Microsoft muted applause. She has, however, been great at cutting costs and so far these cuts appear not to have hurt Yahoo!’s business. Yahoo!’s third quarter cost reductions were impressive. Expenses were $758 million after a $17 million restructuring cost is backed out. That figure compares with $944 million a year ago. Yahoo! cannot continue to cut costs at this rate. That leaves it in an awkward situation unless its search and display advertising surge next year. That is unlikely to happen. Yahoo! appears to have lost its capacity for “organic” growth, and that makes Bartz’s Microsoft decision intelligent. It is likely to be Yahoo!’s only viable way to improve sales.

Economists have been worried that companies would only show reasonable earnings in the third quarter due to cost cuts and that the top line figures would not show much advancement. Many of the firms that have reported earnings fall into this pattern, which means that the recession is still taking its toll on American business

Douglas A. McIntyre