Yahoo searches--for profitability

Technically, Yahoo! co-founder turned Chief Executive Officer Jerry Yang had a full nine days left to finish the promised 100-day review of his embattled Internet media company.

But Yahoo's third-quarter earnings call Oct. 16 was as much a day of reckoning for Yang as it was an update on Yahoo's financials. Analysts wanted details of Yang's plans to make Yahoo more profitable and competitive. And they wanted them now.

To his credit, Yang was ready to provide answers. During the call, Yang outlined a multiyear plan to reenergize Yahoo's profit growth that focused on making Yahoo a place where more users start their surfing experience and spend time, and a one-stop shop for advertisers looking to reach audiences across the Web.

"We have defined a vision of where we want to go," said Yang. "The core is to become the starting point for the most consumers on the Internet, the must-buy for the most advertisers, and to deliver open, industry-leading platforms that attract the most developers."

Income falling
In an effort to get audiences to start their surfing experience on Yahoo, Yang said the company would focus on Yahoo's mail client, search engine, and home page, as well as on Yahoo's most popular properties such as its leading financial and sports sites.

The company plans to increase the attractiveness of these sites by enabling greater personalization--showing sports scores on the homepage to sports fans, for example--and allowing outside developers to build programs that easily integrate with Yahoo's pages. "We intend to be flexible with our infrastructure and open up Yahoo to an ecosystem that is larger than what Yahoo can provide," said Yang.

Yahoo wants to speed innovation. Openness is a part of that, but so are recent efforts to divert resources from initiatives, such as Yahoo's paid subscription music service and entertainment properties, and toward developing new applications and services.

If anything, Yahoo's performance in the past three months underscored the need for a turnaround plan. Though Yahoo's revenues of US$1.77 billion beat the high end of Yahoo's own guidance by about US$460 million, Yahoo's net income fell more than US$7 million from the prior year, to US$151 million, or US$0.11 per share.

Swelled headcount

Investors were prepared for the news. Yahoo executives had warned analysts in July that third-quarter profits could suffer from possible advertiser cutbacks related to the credit crunch and the immediate impact of acquisitions.

On the whole, The Street erred on the side of caution, anticipating earnings of just US$0.08 per share. "The revenue acceleration is obviously a move in the right direction," said Goldman Sachs (GS) analyst Anthony Noto during the earnings call. "The profitability is going down."

Investors responded to Yahoo's mixed signals by bidding the stock up 10 percent higher in after-hours trading, to nearly US$30 per share. The enthusiasm was as much a vote of confidence in Yang's plan to increase long-term profitability as it was a response to Yahoo's results this quarter.

During the call, Chief Financial Officer Blake Jorgensen raised guidance for the fourth quarter, estimating that revenues, excluding traffic acquisition costs, will fall between US$1.31 billion and US$1.45 billion. He expects net income for the fourth quarter to be between US$480 million and US$550 million.

Jorgensen cautioned that margins in the fourth quarter could suffer from larger economic issues and the immediate costs of integrating acquisitions such as ad outfits Right Media and BlueLithium, as well as e-mail service Zimbra.

Jorgensen said Yahoo's headcount would increase due to the acquisitions and, while future profitability would make up for the increased labor force, the company could see some immediate margin pressure. He also cautioned that, should the credit crunch and recession fears adversely impact online advertising, Yahoo could see a slowdown in spending.