Yahoo Tops Q1 Forecast, Thompson Promises More Change

by , Apr 17, 2012, 8:27 PM
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After promising major changes at the start of the year, incoming Yahoo CEO Scott Thompson delivered in April as the Internet giant laid off 2,000 employees and undertook a major internal reorganization. While those changes did not impact its first-quarter results, Yahoo nonetheless posted revenue and earnings that beat Wall Street estimates.

The company Tuesday reported quarterly net revenue of $1.08 billion, up from $1.06 billion a year ago. Net income rose 28% to $286.3 million -- or 23 cents per share -- from $223 million, or 17 cents, in the year-earlier period. Analysts had expected earnings per share of 17 cents on net revenue of $1.06 billion.

Yahoo’s first quarterly revenue gain since the third quarter of 2008 was fueled in part by higher-than-expected search revenue, which helped offset a 4% drop in display advertising sales.

Thompson, who took the reins at Yahoo in January, is the latest to attempt to overhaul the Web portal to better compete with rivals like Google and Facebook. His first significant step was one familiar to Yahoo watchers: massive layoffs. The company cut 2,000, or 14% of its workforce, in an effort to reduce costs by $375 million annually and streamline operations.

It was the largest round of layoffs since 1,500 were let go under then-CEO Jerry Yang in 2008. All told, there have been six rounds of job cuts at Yahoo in the last four years, including about 1,500 under Thompson’s immediate predecessor, Carol Bartz.

Following the layoffs, Yahoo announced a broad restructuring under which the company would be organized into three main divisions --consumer, geographic regions, and technology -- supported by the company’s established corporate teams.

The consumer division will comprise media, connections and commerce, while regions separate out the company’s divisions globally to focus on advertising in their respective areas. The new management framework goes into effect May 1.

During a conference call with analysts, Thompson reiterated his commitment to restoring strong growth at Yahoo while outlining further steps to revitalize the company after a comprehensive review of its businesses and operations.

These include shutting down or consolidating some 50 non-productive properties, focusing on core properties like Yahoo News, Finance, and Mail, accelerating technology deployment, and making better use of Yahoo’s vast store of user data to improve advertising results, and limiting R&D efforts to its owned-and-operated properties. 

He did not specify which properties would be eliminated.

As a leading media and communications company, Thompson said Yahoo did not need to fundamentally reinvent itself. “But I’m equally convinced we absolutely do need to reinvent the experiences our users have with the marquee properties that bring them to Yahoo every day,” he said.

To that end, Thompson yesterday announced the hiring of former PayPal colleague Sam Shrauger to co-lead Yahoo’s new commerce unit with current Yahoo exec Mollie Spillman. He said the push to build up Yahoo’s fee-based businesses would begin in core areas like autos, travel and shopping, with more details to come in the next 90 days.

While seeking to add new revenue streams, Thompson also reaffirmed the importance of the company’s search and display advertising businesses. An unexpected 8% gain in search revenue to $384 million in the quarter helped mitigate the 4% drop to $454 million in display ad sales as a result of weaker-than-anticipated sell-through rates.

The rise in search sales from a year ago was driven mainly by improvement in revenue-per-search (RPS) rather than from any gains in search volume. The latest comScore data shows that Yahoo’s U.S. search share continued to decline in March, to 13.7% from 13.8% in February and 14.1% in January.

Yahoo CFO Tim Morse said the company and Microsoft continue to work on its search alliance to improve the performance of the software giant’s AdCenter advertising platform. He added that softness in the search market was offset by Microsoft’s guarantee of any shortfall in expected Yahoo search revenue through March 2013.

On the display side, Morse called the revenue dropoff “unacceptable,” but indicated that business would return to single-digit growth in the current quarter based on stronger bookings so far.

Yahoo overall projects net revenue in the second quarter will be $1.03 billion to $1.14 billion, compared with $1.08 billion projected by analysts.

During the conference call, Thompson also touched on some other significant Yahoo issues, including efforts to sell its Asian assets -- its stakes in Alibaba Group and Yahoo Japan. While active talks with Alibaba are ongoing -- based on a simplified transaction structure -- he indicated that discussions to sell its 35% stake in Yahoo Japan have hit an impasse over its valuation.

Thompson also alluded to Yahoo’s recent patent lawsuit against Facebook, saying the company had taken the action to defend its intellectual property after negotiating unsuccessfully with the social networking powerhouse. Facebook has since countersued.

Yahoo also faces a proxy fight after naming three new board members in March against the wishes of activist hedge fund Third Point, one of its largest shareholders. Third Point wants to install its own slate of board members including former NBC Universal head Jeff Zucker. Thompson referred to the new board members, but had no comment on the matter.

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