Last Updated Apr 21, 2010 11:58 AM EDT
The press has focused on a 14-percent year-over-year drop in search advertising revenue and called that the reason for investor skittishness. But I think there's something broader and more troubling going on. Forget for a moment that out of the $0.22 per share earnings, $0.07 owed to either the sale of Zimbra or transition cost reimbursement from Microsoft. Instead, notice that operating expenses dropped to $702.6 million this last quarter, down from $778.6 million in 2009. In other words, $76 million out of the $87.3 million increase in income from operations came from cost cutting. I'm not knocking cost cutting, as it's a necessary part of business, but that's simply getting something under control that wasn't. What Yahoo needs is to grow.
Growth means an increase in revenue, and on that front, Yahoo didn't do so well: 1.1 percent. But the real eye-opener is in the details of growth. Marketing services -- the basis of Yahoo's business -- grew by roughly $39.3 million. Of that figure, $3.1 million was from Yahoo's owned and operated sites; $36.3 million was from affiliate sites. That is deeply disturbing, as Yahoo itself contributed just about 7 percent of the marketing services growth. Keeping that in mind, look at this chart of daily traffic rank trend from Alexa.com:
Remember, these are Alexa's relative rankings, not numbers of visitors. But when you look at Yahoo in comparison to Google (GOOG), Facebook, and Twitter, it's the one business whose traffic is in decline.
Yahoo has long positioned itself as a place where people go to get things done online. Yet the latest data suggests a growing portion of people who once saw Yahoo as a primary destination now go elsewhere. Habits are changing among consumers and business users as they find other places to gather information and communicate. (Think: Google, Twitter, Facebook) That strikes right at the heart of Yahoo's business. Unless the company can find a way to make itself genuinely relevant -- rather than simply adding Twitter and Facebook feeds to user accounts -- Yahoo's future will be one of continuing decline.