J.P. Morgan Lowers Yahoo Target, Cites Display Deceleration
In a report sent to investors this morning, the Wall Street firm noted that Yahoo's display advertising growth has "decelerated" from a rate of 17% during the first quarter to 5% during the second quarter of 2011.
"Display dropped off significantly in June - and was down in the U.S. for the second quarter overall - led mostly by lack of coverage in field sales and then partly by some broader softness in CPG, auto, retail, and technology," the report notes, adding that AOL went through a similar reorganization in late 2009 and early 2010, and that it took AOL about a year to "rebuild the pipeline and return to growth."
"Yahoo is coming from a stronger position, it's already weeded out lower-quality inventory, and its display business is more likely to slowly grow than decline," the analysts wrote, "but we still believe it could take 3-plus quarters for Yahoo to return to normalized levels."
The J.P. Morgan team said Yahoo believes it can return to double-digit display advertising growth in 2012, and will likely be helped by relatively easy comparisons to 2011, but it said its display advertising performance ultimately will depend on "strong execution and sales force retention."
The report attributes the slowdown to a reorganization of Yahoo's display advertising sales force that took place in May, which it said resulted in "significant turnover" and displaced much of its "feet-on-the-street" presence on Madison Avenue.
"As a result, the sell-through rate fell short, and much of the ad units that would typically be sold as guaranteed placements were instead sold as non-premium inventory through the exchange at far lower prices," the equity researchers said, adding that Yahoo's sales force is now back up to where it was six months ago, but that many of the account executives are new and will take time to "get up to speed."