Yahoo May be Turning the Corner with Ad Strategy, Acquisitions

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Includes: AABA, GOOG
by: Chris Krasowski

Bellwether in the technology sector, Yahoo (YHOO) had modest expectations after quarters of struggles and declining growth. Today's earnings were a pleasant surprise as Yahoo topped expectations, signaling that it may be turning the corner with its ad platform and new acquisitions strategy.

Income fell slightly to $151 million, $0.11/share, same as a year ago, but revenue for its own web businesses came in above expectations at $1.28 billion. Analysts had expected $1.24 billion on the top line number and $0.08/share in profit. Yahoo's guidance for the 4th quarter was within the range expected by analysts and that led to relief, leading shares up in after hours trading.

Although Yahoo is losing search share to Google (NASDAQ:GOOG) it is not going down without a fight. In fact, Yahoo is actively securing exclusive Internet ad deals, and highlighted a few new ones at the end of the quarter. The company will now produce ads for WedMD, Forbes.com and Cars.com. A slight coup if you will, since WebMD was previously using Google's ad network. These are the kinds of aggressive moves that will bring Yahoo back into the limelight, as Yahoo notoriously lost out in several high-profile bidding wars recently.

New CEO Jerry Yang made it his mandate to do a full review of all business units and so far he is sticking to his word in trying to turn Yahoo around. This quarter is a start, however since Google is still miles ahead of everyone in search. If Jerry and the Yahooligans keep securing more exclusive ad space and build out their network, the fruits of that labor will be seen in quarters and years to come.

Yahoo however has to focus on its core priorities and manage its huge user network. The most visited site on the Internet has to have a clearer plan on how it bring all of its services to all of its users in a cleaner and more efficient manner. This is priority number 1 in order for the company to return to its previously held dominant Web position.

Yahoo's successful quarter signals that advertising remained healthy even during the credit crisis and housing downturn, which is a very good sign for the major player in the sector, Google. In fact Google gained $12 after-hours Thursday on Yahoo's news as investors anticipated even better numbers from the leader in search advertising Thursday.

This quarter was a definite sign of relief for Yahoo longs, and as the holiday season approaches, it's all smiles for the company. If Jerry can continue to tighten operations and secure further ad deals he'll, have a high flier on his hands in the year or two.

The the engineers at Yahoo need to continue to innovate and not let the likes of Google and Facebook keep stealing users away. The results here are promising, but Yahoo's valuations are still much higher than Google's on a forward basis, and only continuing accelerations in profit growth will keep the company on this perch.

Disclosure: Author is long GOOG