• by Tameka Kee , October 17, 2007

At the start of Tuesday's earnings call, Yahoo CEO Jerry Yang defined the execution of three strategic objectives as crucial to the Web giant's future success--becoming the "starting point" for most Web users rather than original content creator, becoming the "must buy" with inventory for advertisers, and creating industry-leading platforms that are open to outside developers.

Yang, President Sue Decker and CFO Blake Jorgensen were openly optimistic during the call--with Decker actually laughing at one point during her prepared remarks--and with good reason. Q3 was the first time the Web giant posted gains in earnings, search and cash flow numbers in 2007.

Shareholders, financial analysts and industry insiders have been watching closely to determine whether Yahoo could rebound from consecutive quarters of poor performance (under former CEO Terry Semel) when it came to stats like revenue per search and display ad revenue. And while the Web giant's senior management stressed that they still had lots of work to do, Q3's numbers were a welcome change from the previously lackluster forecasts.

For search, the global migration of advertisers to Panama is almost complete--running slightly ahead of schedule. But financial gains from the new algorithm and search marketing platform are starting to become concrete, as revenue per search is up over 20%--and search revenue on Yahoo's "owned and operated" sites grew by more than 30% from the third quarter of 06. The Web giant also sparked a turnaround in display ad revenue from last quarter, with 20% growth (up from the low teens in Q2).

Decker commented that Yahoo had much to gain from bringing the relevancy of search to all of their advertising initiatives--and by continuing to improve the user's search experience with features like Search Assist and in-page transactions and videos, the Web giant could help users "go beyond search to complete tasks."

Yahoo's continued growth in the display market should be fueled by the Web giant's acquisition of the Right Media ad exchange (which closed in Q3), and the Blue Lithium ad network (which will close in Q4). Decker said that the technology, sales forces, and inventory of both acquisitions will help the company move forward with its goal of creating a "one-stop shop" for advertisers.

Newly announced search and display partnerships with BeBo and WebMD, as well as display deals with Ziff-Davis Media, Cars.com and Forbes.com, increase the Web giant's portfolio of off-network inventory--further diversifying the kinds of packages they can create for advertisers.

Revenue on Yahoo's U.S. properties continued to accelerate--up 24% in Q3 (compared to 18% in Q2 and 14% in Q1). Meanwhile, the Web giant's unique visitor numbers were up 14% year-over-year, and page views were up 20%--a vital sign, given Yahoo's new focus on becoming the start page for a majority of consumers (and snagging their clicks and impressions for advertisers).

Decker also expanded on Yang's vision of an "open platform," outlining a strategy that would have Yahoo open up its front page to third-party content providers and developers--as well as leveraging the acquisition of social news service BuzzTracker to create a more current, relevant user experience.

The company posted revenue of $1.28 billion. But while the call was mostly optimistic, Jorgensen did run off some numbers that could still concern shareholders.

For example, while Q3's free cash flow of $310 million made up about 66% of the company's operating cash flow ($466 million), Yahoo's self-defined measure of excellence was actually only up by 9% year-over-year. Analysts linked that modest performance to a significant decline in CAPEX (down by almost $100 million from last year).

U.S. operating margins were also down--a drop from 35% last year to 28% this year. Jorgensen acknowledged that this was not a good sign, but attributed the decline to aggressive hiring. Given that Yahoo will no longer focus on being the creator of entertainment and other online content, analysts are forecasting layoffs (while Yang alluded to the shuttering of the Web giant's podcast and premium music services as examples of cost-cutting and sharpened focus).

In the wake of the call, the after-hours market responded with trading that sent Yahoo's shares up by almost $3--bumping share price closer to the $30 mark than it has been in almost four months.