Yahoo’s Google Move Makes Current Sense

By Peter Pham - February 21, 2013 | Tickers: AMZN, AAPL, GOOG, MSFT, YHOO | 0 Comments

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Yahoo! Inc (NASDAQ: YHOO) has revealed that it will start using rival Google’s (NASDAQ: GOOG) advertising services, Adsense and AdMob, as it looks to increase its revenue base. In an official blog post dated 6^th February, the company said that it has entered into a non-exclusive agreement for contextual advertising to be displayed on Yahoo.com as well as its co-branded sites for auto, finance, news and sports. This is in line with Yahoo CEO and former Google executive Marissa Mayer’s strategy to give a better experience to Yahoo’s users, through more customized ads, so that they can spend more time on Yahoo properties. Although Yahoo’s users won’t notice any significant change, it is almost certain that Yahoo will see increasing revenues through its partnership with Google.

This contextual ad agreement also works legally.  A court ruling in 2008 made it clear that Yahoo cannot partner with Google on search engine advertising, which is why Yahoo hooked up with Microsoft’s (NASDAQ: MSFT) Bing search engine – an arrangement that Yahoo is none to happy with. Since the current deal is not about search engine ads it should fly right under the radar of the U.S Justice Department. Google is the undisputed king in the display ad market with an 18% share (according to EMarketer,) followed by Facebook with 15% share, while Yahoo itself trails far behind with just 8% of the $17.7 billion U.S display ad market. Moreover, there are very few rivals for Google’s advertising platforms– although Amazon (NASDAQ: AMZN) is gearing up to launch its own advertising service that would use its recommendation engine to display ads on other websites; a worry for sure, given Amazon’s ability to execute into new markets, but it’s not a worry right now.

The news of they Yahoo/Google deal was already expected as Mayer, during the World Economic Forum held in January 2013, stated that she would prefer partnering with the bigger players, such as Google, Facebook or Apple (NASDAQ: AAPL), over launching a new product like smartphones or a social network.  She has rightly figured out that Yahoo is in no position to re-make itself with a grand slam, but rather with a series of small, accretive moves to stabilize traffic and relevance, while it continues to find ways to leverage core products like Finance, Mail and Sports.   

I’ve always been a fan of Marissa Mayer, and her hire may be the best thing to happen to Yahoo in years. Within a span of a few months, Yahoo has reaffirmed its position – after several years of bickering and drifting – as a company with a plan. This was evident in the recent quarterly results, released in late January: the first full quarter under Mayer. The company’s revenues, excluding traffic acquisition costs (ex-TAC,) increased to $1.22 billion from $1.17 billion a year ago which translated into non-GAAP EPS of $0.32, up from $0.24 in 2011.  For the full year, Yahoo’s ex-TAC revenues increased by 2% to $4.468 billion for an EPS of $1.17, which is $0.04 above analysts’ estimates. This is significant because not only did Yahoo top estimates, but its revenues went up for the first time in four years, despite the shutdown of Korean operations and restructuring costs.

For the full year, paid clicks and price per click rates increased by 11% and 1% respectively. The results also include the sale of Yahoo’s stake in China’s ecommerce giant Alibaba.  As a result, the company has $3.5 billion more in cash and cash equivalents at the end of 2012 as compared to the end of 2011.  I’m still very critical of its plan to take part of that money and buy shareholder loyalty when a well-executed turnaround plan is far more lucrative and the money could be put back into a business hollowed out by mismanagement for nearly a decade.

In the last six months, Yahoo’s stock rose 23.7%, ahead of Google which is up 19.8% while the Dow Jones Internet Index Fund (AMEX:FDN), which tracks the performance of the leading Dow Jones internet companies including both Google and Yahoo, rose 19.5%.  Yahoo is still not trading at a premium as investor’s are still not wholly convinced of the future viability of this new Yahoo.  But as we’ve seen with other technology giants that have tried to alter its fortunes, the market loves a plan so much more than no plan.  Mayer’s plan right now is focused on revenue and improving what Yahoo still offers.  The remake will have to come later.

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