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WIKI ANALYSIS
Yahoo! Inc. (Nasdaq: YHOO) is a global internet services company that operates the Yahoo! Internet portal. It provides varied products and content, from email and search to media streaming and downloads. As of May 2009, it was the second-most popular Internet site by monthly traffic, with visits from between 120 to 140 million unique users every month.[1][2] According to internet analytics site Alexa.com, Yahoo had consistently been ranked the most visited site on the net by traffic until January 2009 when it was supplanted by Google.[3]
Yahoo's "marketing services" segment - which makes up its online advertising business - made up 86.5% of the company's revenues in 2009 Quarter 1.[4] Google and Yahoo! are the recognized leaders in this market, but the balance of power shifted significantly since 2004, when the companies posted similar revenue and operating margins. Google has since eclipsed its main rival - in fiscal 2008, it generated 67% more revenue ($21.8 billion) than Yahoo! ($7.2 billion) with an profit margin over three times as high (19.4% vs 5.89%).[5][6]
In 2008, Yahoo! came to an important crossroads in its history. News of software giant Microsoft's unsolicited $46 billion bid to buy the company was widely reported, raising questions about Yahoo!'s future. A merger between Yahoo! and Microsoft would have created a company with the potential to challenge market leader Google for in online advertising sales, as well as impact Google's dominance of search. Using 2007 data, a combined Yahoo-Microsoft would have had 32% of the ad revenue market versus 44% for Google, and 32.7% of internet search versus Google's 58.4% market share.[7] Ultimately, Microsoft withdrew the offer after Yahoo! refused its second offer of $33 per share, a $5 billion increase from their initial offer. Subsequently, billionaire investor Carl Icahn started a proxy battle for Yahoo! after the second Microsoft offer was spurned. In July 2008, Icahn was appointed to Yahoo's board of directors, along with two of his "allies"[8] In January of 2009, Yahoo removed Yahoo! founder Jerry Yang as its CEO and appointed in his place Silicon Valley tech veteran Carol Bartz.[9]
Company Overview
Business and Financial Metrics
Founded as a web directory by two Stanford graduates in 1994, Yahoo! has since become a dominant player in the field of Internet services. While the company has experienced healthy growth in top-line revenue year over year for the last four years, net income has fallen year-over-year due to increased costs of doing business in the increasingly competitive sphere of internet advertising.[10] Specifically, Yahoo's year over year cost of revenue is increasing faster than their revenue growth.[5]
Fiscal 2009 began inauspiciously for Yahoo!, with the company posting Q1 revenue of $1.58 billion, down 13% from the company's previous quarterly revenue of $1.81 billion and Q1 2008's total of $1.82 billion. Net Income for the quarter, however, is $117.56 million, up from a net loss of $303.43 million in Q4 of Fiscal 2008 but down 43% from the previous year's total of $536.84 million.[11]
On July 21st 2009, the company announced earnings for Q2 of 2009. Yahoo beat analyst expectations with EPS being 10 cents/share compared to the estimated 8 cents/share. The net income increased from $ 131 million in 2008's 2nd quarter to $141 million for 2nd quarter in 2009. Revenue, however, declined 13% year over year to $1.573 billion from $1.798 billion. This decrease has been attributed to currency rate fluctuations, the sale of Kelkoo in late 2008 and lower fees revenue from voice-over IP services and subscription music offerings.[12]
Yahoo once again beat analysts’ expectations during its 3Q fiscal 2009 results. Yahoo’s net income more than tripled to $186.1 million, up from $54.3 million, a 244% increase year-over-year. However, the company’s revenues fell 12%, from $1.79 billion a year ago to $1.57 billion. Profits were large, in part, because the company sold its stake in the Chinese website alibaba.com, because of its cost-cutting strategies, and its better-than-expected revenue from display ads as it still remains the top U.S. seller of online display adds. [13]
Business Segments
Marketing Services (88% of Revenues)
Yahoo!'s primary revenue stream is from the sale and facilitation of internet advertising and related services, generally referred to as "marketing services". This segment alone accounted for 88% of total revenue in fiscal 2008, and has remained at a steady portion of the company's' income year over year..[14]
Fees (12% of Revenues)
Yahoo! gets the remainder of its revenue from fees for premium services such as music downloads, small business services, and data storage. As with the Marketing Services segment, fees have accounted for a consistent percentage (11-12%) of Yahoo's total revenues year over year.[15]
Below is a breakdown of Yahoo!'s approximate operating metrics, including total revenue, advertising/marketing services revenue, and operating margins.[16][14]
| Year | Total Reported Revenues (millions) | Revenue from Marketing Services (millions) | % Revenue attributable to Marketing Services | % Operating Margin |
| 2005[17] | $5,260 | $4,600 | 87% | 21% |
| 2006[18] | $6,430 | $5,627 | 88% | 15% |
| 2007[18] | $6.969 | $6,088 | 87% | 10% |
| 2008[18] | $7,209 | $6,316 | 88% | .1% |
Offerings
Yahoo!'s offerings can be divided into two categories, product-based and content-based. In addition to these basic offerings, Yahoo! has expanded into mobile advertising, content, and services.
- Product-based offerings include Yahoo web mail and Messenger, Maps, and classifieds/personals options. In addition, Yahoo! 360° offers a blog/web community that tries to rival MySpace, small business solutions (online stores, business-grade email, web hosting/domains), and commerce opportunities (Yahoo! Shopping, Autos, Auctions, Travel). Yahoo!'s flagship product remains its search engine, recently revamped and renamed OneSearch. OneSearch tries to deliver an integrated search experience, letting users benefit from the convenience of hybrid search types while also leaving the option of type-specified search (e.g., image search).
- Content-based offerings are focused on entertainment and media. Yahoo! boasts an extensive collection of video and music for streaming/download, and its 2005 acquisition of Flickr also gives it a strong presence in the photo upload/sharing niche. Yahoo!'s news offerings include finance, news, movies, and sports information.
Yahoo! has also recently reorganized its company structure around three areas of focus: Audience (general web traffic), Advertisers and Publishers (those paying to advertise through Yahoo!), and Technology (new platform/product development).
Trends and Forces
Partnership and Merger Potential
Following Microsoft's aborted attempt to buy Yahoo!, the company has explored other partnership opportunities with two of its biggest competitors. In June, 2008, Yahoo and Google announced a plan that would allow Yahoo to place Google ads on its web site. This revenue sharing agreement would have potentially netted Yahoo $800 million a year. The deal was initially seen as an attempt by Yahoo to fend off Microsoft. Because of Google's dominance of the search market -- Yahoo is No. 2 -- many advertisers oppose this plan. Google and Yahoo together control 80% of the search advertising market, and, as a result, the plan has been opposed by the U.S. Public Interest Group on grounds of antitrust. [19]Inevitably, in order to avoid further antitrust law complications, Google backed out of the deal in early November, 2008.[20]
As a result of Google withdrawal from a deal that would have netted Yahoo approximately another $800 million, the possibility that Microsoft would again bid for Yahoo was revived. In May of 2008, Microsoft offered Yahoo $33 a share, but rescinded their offer when CEO Jerry Yang demanded $37, a price that Yahoo had not reached since early 2006. Now, with the Google Yahoo partnership removed, Yahoo CEO has announced that "To this day, I believe the best thing for Microsoft to do is to buy Yahoo,".[21]As of November 5, 2008 there are no known talks between Microsoft and Yahoo, with Microsoft CEO claiming, "I'm sure there are still some opportunities for some kind of partnership around search, but I think acquisition is a thing of the past,".[22]
As of May, 2009, media outlets are reporting that top executives from Microsoft and Yahoo have been meeting to discuss a potential partnership focused on search.[23] Such a partnership would bring together Googles two biggest rivals in the search sphere, potentially boosting Yahoo's revenue and net income by cutting into Google's market share. On July 29, 2009, the two companies announced a 10-year collaboration in internet search and online advertising. Microsoft's well-regarded new search engine 'Bing' will also be used by Yahoo, and Yahoo will spearhead advertising sales efforts for both companies, with Yahoo obtaining 88% of the ad revenue generated by search results on Yahoo's web sites during the first 5 years of the agreement. The agreement is subject to regulatory review.
As the New York Times characterized the transaction, "the bumpy, marathon mating dance between Microsoft and Yahoo finally concluded." The two companies hope to achieve better efficiencies of scale by a division of labor, with Microsoft focusing on search engine development and Yahoo! focusing on advertising sales. With a greater critical mass of viewers, prospective advertisers may be more amenable to utilizing their search resources.
Increase in Online Advertising
Advertising spending continues to show a disproportionate skew in favor of newspaper, TV and direct mail. However, the Internet channel has grown 18% per year since 2001--faster than any other channel--taking share from stagnant channels such as newspaper, which has been flat over the same time period. Internet advertising revenues for the third quarter FY2008 were nearly $5.9 billion, representing an 11 percent increase over the same period last year, according to the Interactive Advertising Bureau.[24]
At its current growth trajectory, worldwide Internet use is expected to nearly double by 2010, hitting 1.8 billion distinct users. Continued growth in quality and availability of Internet access means that the Internet services sector--particularly Internet advertising--will remain lucrative for some time to come. An increasingly pronounced trend of replacing print directories and classifieds with virtual alternatives will also create a push for online search use as well as increase demand for online classifieds.
Online Video Advertising Growth
Video advertising promises to be a particularly lucrative area of rapid growth in the online advertising sector, expected to grow by more than one third of its current size in one year. While Yahoo! stands to gain from any increase in video advertising, it with its Yahoo! Videos offering lags significantly behind Google's YouTube, with the latter boasting roughly 40 times the viewership of the former.[25][26]
Branded vs. Search Advertising
Branded advertising is often image-based and usually priced on an "impressions" basis--the more times it shows up, the more the advertiser pays. Search advertisements are primarily text-based and usually rely on click-through; the more times a particular link is clicked, the more Yahoo is paid. Together, the two constitute a good balance of different kinds of online advertising. However, branded advertising tends to depend very heavily on the economic situation of the brands in question--so if the United States experiences an economic slowdown, for instance, Yahoo's branded advertising would suffer significantly.
Mobile Advertising
Mobile advertising is in its nascent stages and is currently growing at more than 20% per year, making it a powerful source of potential growth for Yahoo!. On its end, the company has been actively pursuing partnerships with carriers and original equipment manufacturers in the mobile industry, as well as tayloring their preexisting marketing services to specifically mobile users.[14]
Expanding International Markets
Strong expansion in Internet connectivity and activity in Asia and Europe means that Internet service companies will have to consider much more than just the domestic advertising scene. Yahoo! is well-positioned for a rise in Asian traffic and advertising. Asian companies exhibit a tendency to stick with familiar, well-known, tried-and-true options, both for search and for advertising. Yahoo!'s well-established name and solid partnerships in Asia make international expansion a promising opportunity for the company. China's Internet demand has risen dramatically and now has the second largest number of Internet users in the world.
But in Europe, Yahoo! may face more challenges, losing significant search share here to Google and Microsoft.
Yahoo owns a roughly 40% stake in Alibaba, a Chinese internet company that IPO'd in Fiscal 2008.
Declining Relations with Telecommunication Companies
Yahoo!'s partnerships with companies like AT&T (T) to provide "premium" email and other services are being shaken by the recent trend among other Internet service providers of reducing or eliminating fees for premium features. As a result, Yahoo!'s premium email is no longer worth so much to the telecommunication companies' consumers. AT&T announced in March 2007 that it would be looking to renegotiate its contract with Yahoo!, a move which will likely result in a loss of revenue for Yahoo!. About 15% of Yahoo!'s total revenues currently come from premium fees, and of this fee-based revenue, 40% comes by way of telecommunications partnerships (about $300-400 million). vary.
Competition
- Google (GOOG) is commonly acknowledged to be Yahoo!'s biggest competitor. Its recent acquisition of popular video site YouTube put it directly against Yahoo! in media streaming, and the two already have a long-standing rivalry over search-based online advertising. Yahoo! has lost significant search market share to Google. In January of 2009, Google made headlines by overtaking Yahoo in unique users per month. However, Yahoo! recently released a next-generation online advertising platform system called Panama. Their system will in theory optimize advertising profits by increasing the average revenue per search click and has returned modestly successful results so far. Yahoo!'s recent acquisitions of RightMedia and BlueLithium [1] further solidifies its position in display advertising. Finally, Yahoo!'s perceived role as a community-based entertainment site may also give it a slight edge over Google in entertainment-based advertising. However, Google's MySpace-YouTube advertising alliance may be poised to challenge the company.
- Microsoft (MSFT), with the introduction of Windows Live and adCenter, Microsoft is also a growing threat. Microsoft's acquisition of LiveJournal gives it a significant foothold in the webblog scene, and along with Google, it has been steadily gaining ground against Yahoo! in the European Internet services market. However, by itself Microsoft remains less a threat than Google. In 2009 Microsoft announced its new search platform Bing this reinvention of its previous search platform MSN search is a future threat to Yahoo's search market share.
References
- ↑ Compete.com's comparison of Yahoo and Google. Compete.com. Retrieved on 2009-05-10.
- ↑ Quantcast.com's analytics for Yahoo.com. Quantcast.com. Retrieved on 2009-05-10.
- ↑ Alexa.com's analytical information on Yahoo. Alexa.com. Retrieved on 2009-05-10.
- ↑ YHOO 09Q1 10-Q pg. 17
- ↑ 5.0 5.1 5.2 YHOO 2008 10-K pg. 56
- ↑ GOOG 2008 10-K pg. 61
- ↑ Will Yahoo Accept Microsoft's bid?. Seekingalpha.com (02-05-2008).
- ↑ Yahoo Will Add Icahn to Its Board. The Wall St. Journal Online (07-21-2008).
- ↑ Yahoo names tech veteran Carol Bartz as new CEO. USA Today (01-13-2009).
- ↑
- ↑ Yahoo! Inc.'s 10-Q For Q1, 2009, Section 1
- ↑ Yahoo Beats But Revenues Falls. iStockAnalyst (2009-07-21). Retrieved on 07-23-2009.
- ↑ Yahoo’s Profit Triples Despite Sales Decline.
- ↑ 14.0 14.1 14.2 Yahoo! Inc. Form 10-K for Fiscal 2008, Section 1a
- ↑ Yahoo! Inc. Form 10-K for Fiscal 2008, Section 7
- ↑ YHOO 2007 10-K, Item 1.
- ↑ YHOO 2006 10-K pg. 37
- ↑ 18.0 18.1 18.2 YHOO 2008 10-K pg. 105
- ↑ Consumer group opposes Google, Yahoo partnership (Reuters) news.yahoo.com released October 29, 2008
- ↑ Google scraps ad deal with Yahoo - November 5, 2008
- ↑ Yahoo CEO to Microsft: Make us another offer - November 5, 2008
- ↑ Microsoft CEO rules out yahoo bid - November 7, 2008
- ↑ Business Insider Coverage of the potential deal, retrieved 5/10/2009
- ↑ Online advertising up 11 percent from last year (CNET) - November 20, 2008
- ↑ Quantcast's analytics data for Yahoo! Video retreived 5/10/2009
- ↑ Quantcast's analytics data for YouTube retreived 5/10/2009
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