Yahoo Q2 Earnings - Not All Bad

Everyone has focused on the negatives, so I'll hit some positives. Yahoo (YHOO) is clearly in trouble, however, so don't mistake these comments for rosy-eyed optimism. The next year will determine whether the company restores what was once the dominant global Internet franchise to glory--or becomes one of the industry's biggest disappointments. And, this time, if it stumbles down the latter route, it won't have a global advertising downturn to blame.

Positives

We did not have to hear Terry tell us that Yahoo had a great quarter, is outgrowing the market, and is in fantastic shape--and wonder whether he had ever set foot in the place.

Jerry and Sue appear to understand the magnitude of the problem (competition, morale, talent, buzz, bureaucracy).

Despite lagging the market, the company is still highly profitable: $1.5 billion free cash flow run-rate.

Panama is working. Revenue per search is up 15%-20% year-over-year. This is crucial, as search is still the industry's largest and most profitable revenue stream. Alas, the counter problem is that Yahoo appears to be continuing to lose search query share to Google (and in the latest month, god forbid, Microsoft). With fewer search queries, improving RPS won't make a lick of difference.

The user base is huge and still growing. Yahoo now has 463 million users, up 13% year over year (and 17 million paying subscribers, up 18%). Even if all else falls to pieces, this one metric represents enormous potential value. The moment Yahoo's user base stops growing, the company is done.

Revenue is, indeed, accelerating. The most profitable revenue stream, search and display on Yahoo's proprietary properties, is growing faster than the rest of the business and is accelerating. And given the rate at which Yahoo is getting its clock cleaned in its global affiliate business, affiliate revenue will soon be so small as to be irrelevant.

All of which is a long winded way of saying, it ain't over yet. But it will be soon, if Jerry and Sue don't make good use of this latest restart.

See: Yahoo! Q2 2007 Earnings Call Transcript