Yahoo (NASDAQ:YHOO) has been in the news quite a bit over the past few months as the company attempts to take several steps to regain its financial footing. One of the most recent efforts involves the company trying to fend off criticism from not firing its CEO for lying on his resume.
In early May, hedge fund company Third Point demanded that Yahoo's CEO Scott Thompson resign because he lied on his resume. The company, led by CEO Daniel Loeb, demanded that Thompson be fired by noon on Monday, May 7. The deadline date came and went with no action by Thompson or its board of directors. In response, Third Point then demanded that Yahoo make its books and records available to it.
Investors seemed to welcome Third Point's demands, with the stock rallying that Monday. The stock rose 2.2% to roughly $15 by the closing bell. Yahoo's shares had been falling prior to Monday.
However, clearly the Thompson resume debacle is another headache that Yahoo does not need. At the time of writing, Thompson had issued an apology letter. It's unclear whether or not the apology will impact the board of directors' decision on his future with the company. I think the apology is too little, too late.
All of this comes at the worst possible time for the Internet provider. The company has been entangled in legal battles with its competition, with the main one concerning Facebook (NASDAQ:FB). Facebook is going public in mid-May and will be traded on the Nasdaq.
The two companies have been intensely at each other's throats for months. In one of the last lawsuits Yahoo filed, the Internet search company charges Facebook with intellectual property theft. Specifically, Yahoo alleges that Facebook's social network is infringing on 12 of its Internet patents. Previously, Yahoo had charged Facebook with infringing on 10 of its patents.
In response to the lawsuits from Yahoo, Facebook has been equally aggressive in filing lawsuits against Yahoo. While the legal wrangling continues, I agree with most spectators that Yahoo has far more to lose than Facebook, which is why it has been so aggressive in suing Facebook.
I can understand why this threat is worrisome to Yahoo. I believe that the company's saving grace may come from offering more innovative products and moving away from its search engine service. While Yahoo ruled a decade ago as a search engine, it has now been trumped by Google (NASDAQ:GOOG).
When Yahoo announced its first-quarter earnings for 2012, to my surprise -- and many others -- Yahoo beat the estimates. The company reported that revenue, not including traffic acquisition costs, was roughly $1.08 billion for the first quarter of 2012. That is up from the $1.06 billion the company earned for the same period in 2011.
While that was an increase, it was only 1%, which shows the news is not as good as one may think. More troubling is the decrease in income from operations. Income dropped to $169 million in the first quarter of 2012. Income was $190 million in the first quarter of 2011, so that drop was about 11%.
On a brighter note, the company saw its traffic grow worldwide in January and February. The increase was about 7% year over year. This is important for the simple fact that Yahoo's bottom line is being greatly affected by people using other search engines.
I believe this is critical to Yahoo because of the importance of attracting advertisers, which is something that Google and Facebook are thriving from. The same is true for Amazon.com (NASDAQ:AMZN). And while its concentration is not on advertising, the arrival of Pinterest also poses a threat to Yahoo. For that matter, the more time that an Internet user spends on one site, the less they are spending on another. This may seem to be a simple premise, but I believe it boils down to traffic. These Internet sites want users to spend as much time on their respective sites as possible, and so do advertisers.
A key factor to be reviewed closely is which parts of its business lost money this last quarter, and which ones are likely to continue to lose money. Yahoo's core advertising business dropped 4% during the first quarter. I believe that this is another telling sign of the company's financial troubles. It's being bandied about that Yahoo's loss in this key revenue group runs contrary to national trends.
The company is attempting to restructure its businesses, however, which shows it is trying to improve, and many of the steps came at the guidance of Thompson. For example, he contributed to the company reorganizing into three main groups. Those include consumer and technology. The purpose is to bring its resources closer to users and advertisers, according to the company.
Thompson also helped the company to move into more media-related efforts. That included an ABC-produced daily series, "Power Players," on Yahoo News. It features an ABC and Yahoo News analyst team.
Yahoo is also considering jumpstarting talks with two Asian companies that were thought to be imperative for it to significantly improve its operations. These companies are Alibaba.com (OTC:ALBCF) and SoftBank (OTCPK:SFTBF). Unfortunately, talks broke down earlier this year and there was no mention of it in the fourth-quarter 2011 earnings report.
Investors should also keep in mind that Yahoo is trying to become leaner, which will contribute to it improving its finances. For example, it has been announced that it will lay off 2,000 of its workers. The company hopes to save roughly $375 million a year from the layoffs.
It may be much ado about nothing that Yahoo beat earnings estimates. More important to me are the strategies it has in place to capitalize on the growth it has accomplished over the first quarter of 2012. If Yahoo is able to continue cutting costs and find some much needed help through partnerships, I think the stock could reach new highs in 2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.