Yahoo: Profits an Achievement for Bartz - But at What Cost?

YQ3_Q309EarningsPresentationFINAL –

Yahoo (YHOO) announced third quarter earnings today, showing net income more than tripling to $186 million, or $0.13 a share, nearly double analysts estimates of $0.07 a share.

This was definitely a financial achievement for Yahoo CEO Carol Bartz, but it was done almost entirely through cost cutting. Total operating expenses of $775 million was pared down by $169 million from a year ago. In comparison, net income rose $130 million from a year ago.

What investors really want to see is revenues go up again. Unfortunately, Yahoo’s total revenue was down 12 percent from last year to $1.6 billion. And revenues minus traffic acquisition costs (the money Yahoo shares with advertising partners) declined 14 percent to $1.1 billion. On the bright side, revenue were flat with the second quarter by both measures. On the conference call, Yahoo is characterizing revenues as “stabilizing.”

Below are my notes from the conference call Q&A:

Q; display, RPS [revenue per search]?

Tim Morse, CFO: $15M impact from ad quality, overall display grew, guaranteed side grew relatively strongly, things are starting to loosen up, ad dollars are starting to flow a little bit better.

In terms of results in search, tough to compare to Google, I’ve got to focus on Yahoo and what we . this quarter only down 1%. That feels to us like stabilization. RPS only being down slightly. Year over year queries grew double digit

Q: Impact of changed relationship with eBay

Time Morse, CFO: Extremely small.

Q: seeing TAC rates go up, do you have to guarantee more to keep that business intact?

Tim Morse, CFO: our focus is definitely on owned and operated. There is make whole provision for affiliates who leave to MSFT, there is no make whole provision if they go to another competitor. We do have to pay more. MSFT monetizes better. No question.

Q: Q on display, year over year trends, what needs to happen for it to get back on its feet

Morse: I think we are in a good position. We saw better yields this quarter. Economy starting to loosen up a bit, and brand spending coming back.

Q: Gross margins were flat year over year. Do you feel gross margins in net revenue basis can be flat on sustainable basis.

Morse: There is something changing in Yahoo, getting your hands dirty, reducing costs any way you can, that is rewarded at Yahoo now.

Q: Any changes that you’ve made in terms of enabling more rich media ads, how are sell-through rates.

Morse: nothing out of the ordinary to improve quality of the home page. We relaunched it.

Q: looking at guidance, doesn’t look like you are looking for improvement on any line. Is ita lack of visibility or conservatism?

Morse: You’ve got $15M impact going to $25M impact on revenue initiatives, s a little bit of a revenue drag. But we anticipate a good strength in display business because of seasonality. Search also does well in Q4. Perhaps a drag in fantasy sports, since we reduced fees to improve the experience.

Q: pageviews?

Morse: We grew pageviews 5% year over year. Mail was a little more than that, homepage was double digits, upper teens. Sports doing well. tough comps with some verticals, closed some properties. last Q 7% up YoY, this Q 5% up.

Added 200 people to headcount.

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