Yahoo Is Searching For Answers

By Greg Sushinsky | January 29, 2010 AAA

Yahoo (NASDAQ:YHOO) reported fourth quarter earnings that saw net revenue fall while net income improved. Although Yahoo's numbers were in line with analyst estimates, the market reacted by sending the stock up during both the regular and after hours sessions.

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Revenue Down, Income Up
Net revenues, excluding traffic acquisition costs, were down to $1.26 billion from $1.38 billion in last year's fourth quarter. Net income for the quarter came in at 11 cents a share, or $119 million, up from a $278 million loss (22 cents per share) for last year's same quarter. The numbers indicate that Yahoo's slide, which began even before the recession, has eased. Yahoo's CFO, Tim Morse, commented that the ad market is recovering. The company also gave positive guidance for the first quarter 2010, as CEO Carol Bratz said the company had, "momentum."

Yahoo Is Not Google
At the risk of stating the obvious, Google's (NASDAQ:GOOG) terrific fourth quarter report highlighted how much Yahoo is not Google. Yahoo's revamp over the last year saw the beginning of a serious attempt to find a partner for their search business to mitigate the aggressive competition Yahoo faces from Google. Google dominates search, but Yahoo is trying to develop other areas while continuing the overhaul of their search business.

More Than Google Going On
Although Google is the 800 pound gorilla when it comes to search, there are other things going on with the internet. Google's presence in China, which is endangered because of the dispute Google is having with the Chinese government, may benefit Yahoo. Yahoo's presence in China is an alliance with the Alibaba group, and is not that extensive. Chinese internet search company, Baidu (NASDAQ:BIDU), is expected to be the main beneficiary of the spat, but other Chinese internet companies should benefit too. Sohu (NASDAQ:SOHU) has already seen its stock shoot up on this news.

What Yahoo Needs To Show
After the initial reaction to Yahoo's numbers dies down, a sober look will find more trouble. The numbers were relatively flat and the firm will have to grow those in a more Google-like way to be embraced by the market. When you look at Yahoo's performance and its near term prospects, it has certainly reversed its slide. That said, more is needed. Yahoo will have to grow in developing markets, strengthen its position in ad and content delivery and deflect the onslaught of Google by farming out its search.

Every internet company should keep AOL (NYSE:AOL) in mind. AOL is attempting to revive itself through deals like its purchase of online video advertising platform StudioNow. Once the most relevant, potent internet company, AOL is now an anemic remnant. The salvage operation of what was once a juggernaut. The message for internet players is adapt and grow - or flirt with irrelevance and death .

Yahoo will have to do better than merely delivering improved numbers in its current business model. It's going to have to morph. Although CEO Bartz said, "[this] was a transformative year," the market will want to see much more. It's a beginning, but there is a long way to go. (Knowing what the market is thinking is the best way to determine what it will do next. For more information, check out Gauging Major Turns With Psychology.)

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