Yahoo! turnaround turns positive, but Wall Street's more into Chinese whispers

Profile picture for user slauchlan By Stuart Lauchlan April 15, 2014
Summary:
Wall Street seemed keen on Yahoo!'s latest numbers, despite a 20% crash in profits. But are investors applauding Marissa Mayer's long term plans or eyeing up a big cash boost from a Chinese e-commerce IPO?

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Marissa Mayer

Profits down 20%, but share price up 9%.

Someone, somewhere, other than Marissa Mayer, clearly reckons the Yahoo! turnaround is going according to plan.

Or is Wall Street more focused on revenue numbers coming out of Yahoo!’s stake in Chinese ecommerce giant Alibaba?

Certainly Yahoo!’s numbers were nothing to get anyone particularly excited about:

  • First-quarter sales, excluding revenue passed onto partner sites, were $1.09 billion, up from $1.07 billion year on year.
  • Net income was $311.6 million, down from $390.3 million a year earlier, partly due to restructuring charges.
  • For the second quarter, Yahoo!’s projecting revenue of $1.06 billion to $1.1 billion.

Long terms readers will recall that the Mayer turnaround strategy is based on four businesses: mobile, social, native and video. These are pitched by the Yahoo! CEO as:

“Growth businesses for the industry and for the future of Yahoo! These four areas also are our investment businesses as they are the focus of our investments. Mobile, social, video and native are businesses that are still small relative to Yahoo!'s broader business, but they are seeing accelerating growth as we continue to invest in them.”

There are some positive numbers coming out relating to Yahoo!’s allure as an advertising platform:

  • 2% growth in display advertising, ending (for now) a sustained period of decline.
  • 7% year on year growth in number of ads sold, double the rate of Q4.
  • Paid clicks grew 6% on a year-over-year basis and price-per-click grew 8%.

Yahoo! is well placed to take advantage of shifting spending patterns in advertising, claims Mayer:

“We know that there is going to be a huge shift of dollars into the digital medium as PC and mobile continue to increase overall in use. And so this is why we’ve been investing in things like the Yahoo! Ad Manager and the Yahoo! Ad Manager Plus because it really helps us take our products, make them much more powerful and uniformly offer to all of our top clients.

“So for example in the past, we had different ways of buying ads and different ways of targeting ads and access to different data that were available on different platforms. So for example if you’ve had a particular way you wanted to pay in terms of CPC, CPM, CPA, CPE, CPI, you might need to use one platform and you may not be able to for example, access data on a different platform.

“Yahoo Ad Manager Plus and Yahoo Ad Manager break all that down and they make all the data targeting payment and targeting methods that we have available all in one place. And so it’s a great simplification and unification across our ad products and it’s particularly important for very sophisticated top advertisers like the AdAge 100 to have the access to that kind of tool because it really means that you don’t have to pick and choose different types of methods from different formats and not be able to crossbreed them.

“It really makes it a lot easier for us to increase our overall share of their wallet. So right now, I’m overall happy with their spends, but that said, it’s clear that overall, the display market and the native market will grow precipitously, especially as there is more and more digital advertising and the tools we’ve put in place as well as our outreach to those advertisers is designed to gain wallet share.”

The power of the homepage remains strong, argues Mayer:

“For advertisers the power of the homepage takeover essentially the biggest and best billboard on the web is unmatched. It was also an incredibly busy quarter for our sports team. We kicked off Q1 with extensive coverage of the Winter Olympics. In addition to our own editorial coverage of the Sochi Games, we expanded our existing partnership with NBC Sports, giving users access to the network’s exclusive digital video rights including live competition streams and highlights.

“Throughout the game, we saw an almost 30% increase in page views, compared to our coverage of the 2010 games in Vancouver. Just days after the closing ceremony, our sports fanatics were back at it with March Madness. Yahoo! powered the first ever billion dollar Bracket Challenge. We provided up-to-the-minute coverage, scores and insights across mobile and desktop and we saw record engagement numbers on mobile sports, with nearly 1 million downloads over the course of the tournament.”

Mobile moves

Yahoo!’s drive to be mobile first appears to be paying dividends:

  • More than 430 million monthly mobile users, a 30% growth year-over-year.
  • More than half of the total monthly audience comes from a mobile device.
  • Mobile mail has seen a 15% quarter-over-quarter growth in daily active users.
  • Search revenue from mobile approximately doubled in Q1 versus prior year.
  • Mobile headcount has grown more than 130% year-over-year.

Mayer says:

“On being mobile first, we think about our entire business including our mobile products in terms of four key areas: Search, Communications, Digital Magazines and Video, all powered by Flickr and Tumblr.

“Our growth in mobile search is an important part of our long-term strategy. This quarter we saw nearly 100% growth across almost every measure of our mobile search business.

“In terms of contextual and mobile Search, we basically think that there is a huge opportunity moving forward to innovate in mobile search.

“Mobile is such an exciting new platform and what users are really looking for when they do search is really at this time undefined. Sometimes they’re looking more for local, sometimes it needs to be more personal, what types of information they really like to see in that search is really not well understood, defined.”

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And of course the meeting of mobile and advertising continues to be a point of focus:

“We have been pioneering innovative ways to approach mobile advertising. To this end, we launched Yahoo Gemini, the first unified ad marketplace for mobile search and native advertising. For the very first time, we are leveraging our years of experience, building and optimizing ad technology across search and display into a one-stop shop. Assembling tremendous cross functional team here in Sunnyvale, we created a product that combines the performance and ease of search with the scale and creativity of native advertising.

“Advertisers can now buy, manage and optimize their mobile advertising campaigns in one place, driving performance and impact. To streamline the experience, Yahoo Gemini is accessible through our existing ad platform, Yahoo! Ad Manager. In March, we also launched Motion Ads, a new format that introduces subtle animation into rich brand images to create high-impact experiences for advertisers that are entertaining and engaging for users... a powerful and unique form of brand storytelling.”

Magazine stories

There’s storytelling of a different type with the the firm’s digital magazine play also attracting further investment with some expensive content hires, including Bobbi Brown, the New York Times best-selling author, to head up Yahoo!’s beauty magazine, the New York Post’s Paula Froelich for the travel magazine and Joe Zee, formerly the creative director at Elle to lead its fashion magazine. Mayer says such hirings are all about:

“Yahoo!’s effort to re-imagine the way users experience digital content with visually driven storytelling and distinct editorial voices. We continue to see success with our food and tech magazines. The immersive visual experience has captured readers and really driven engagement. In fact, when you look at content sharing like when users share articles with family and friends via Tumblr or email, the rate is 2x to 4x higher on digital magazine than it is on our other verticals.”

That translates into a compelling advertising message, suggests Mayer:

“One of the strengths of Yahoo! Food and Yahoo! Tech has been the share rates we are seeing with content. But what is really exciting for our business and our advertising partners is the engagement rates are similarly increasing with native add content on magazines. Native advertising is a growth business and we’re continuing to focus on expanding the opportunities for advertisers to benefit from these more and more immersive formats.”

On the video front, it’s still early days, admits Mayer:

“Our constraint on video has always been inventory and our investment in building our library in the Yahoo! screen brand is helping us to address this. We have continued to grow users and monthly streams and that’s beginning to translate into revenue growth. While we are only getting started, we’re very focused on this growth business in 2014.

“For example, in the past, Yahoo! has produced more than 70 original web shows. Moving forward, we will continue to bring our users great original content. We will do so with much more focus and quality. Smart, more strategic investments in video can really help us grow our user offerings, traffic and ultimately revenue.”

While all of that is very ‘bleeding edge’ there’s a need to address some ‘back to basics’ stuff as well, most notably tarting up the company’s frankly ageing mail offering. Mayer admits:

“Our mail offering is just over 16 years old. As a company, we need to invest in modernizing and fortifying the infrastructure underlying mail to the same degree that we’ve invested in features. We have a vision that makes our communications the absolute best in the industry. There’s plenty of room for continuing innovation here and we’re just getting started.”

Verdict

These are not exciting numbers, no matter how Mayer positions progress on the turnaround, so how come Wall Street’s giving the firm a break?

baba
Look no further than Yahoo's 24% stake in Alibaba Group Holding Ltd, the Chinese e-commerce giant that:

(a) reported revenue growth of 66% to $3.06 billion in its fourth quarter and
(b) is set to go public in the US with a valuation of between $120 billion and $140 billion later this year.

That IPO will require Yahoo! to sell 40% of its existing stake, providing a healthy bounce in its corporate bank account and buying Mayer some more time to fulfil her promise that revenue will begin to grow modestly in the second half of 2014.

She said yesterday:

“We believe we have moved from our core business being in decline to a point of stable to modest growth. Our modest success this quarter is an important start.

“We believe that the type of growth we’d like to see will take multiple years.”

Mayer’s correct in setting expectations around the long term nature of her turnaround strategy and it's hard to argue with her four business unit priorities for investment.

But once that Alibaba stake is reduced, even with the cash injection that it will bring, she’s going to need to start reporting some bigger home-grown growth numbers if she’s going to keep investors sweet