Yahoo! (NASDAQ:YHOO) is set to report its fourth quarter earnings on Monday, January 28. During the fourth quarter, we got further insight into the company’s deteriorating business. Traffic for core products such as search and mail were down 24% and 12%, respectively, in December 2012 compared to December 2011. . We place a lot of value on this data because Mayer’s turnaround strategy hinges on driving growth by leveraging the existing user base on Yahoo’s platforms. If search and mail traffic are declining, the execution of Mayer’s strategy becomes more difficult.
This is why during this earnings announcement we will be closely looking for clarification on how the CEO plans to stop these declines. We think the new products will be key to the company’s turnaround, and we will be closely watching for any new announcement. Additionally, we will look for signs about the overall health of Yahoo’s display ads business.
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Mayer Must Release An Actionable Growth Plan
Due to the fall in the number of mail and search users, we think Mayer must increase the pace at which Yahoo releases its products. We are hoping that Mayer releases specific plans and timelines for new product lines that are in store instead of stating that it’s continuing to focus on personalization and mobile. In the last six months, Yahoo released only two major redesigns to mail and Flickr. We thought that Fickr redesign was a good way for Yahoo to get new users to the mobile platform, but because Flickr is not a core Yahoo product, the redesign will not necessarily drive traffic to the company’s other services.
Display ads are key for Yahoo’s long-term health
According to our estimates, the display ads segment is the biggest of Yahoo’s operating segments and makes up approximately 14% of the company’s value. While this is not a huge portion at present, display ads will be very important for the company’s long-term prospects once Yahoo liquidates its Alibaba stake and returns most of that cash to its investors.
At present, Yahoo’s display business seems to be struggling with increasing competition. Last quarter, display ad revenues increased only 1% year-over-year to around $506 million. What puts this dismal growth number in perspective is that global display ad spending was expected to increase by almost 20% during 2012, which shows that Yahoo is doing a poor job of capitalizing on online ad spending growth. 
During this earnings announcement, we expect to see Mayer laying out a clear growth plan for the display ads segment. We know that the high level strategy will be focused on mobile and social, but we would like to see more new products being released sooner.
We currently have a $19 price estimate for Yahoo!, which is approximately 20% above the current market price.Notes:
- YAHOO IS BURNING: Mail And Search Traffic Are Dropping Staggeringly Fast, Business Insider [↩]
- Why Google Doesn’t Own the Next Chapter in Web Ads, AllThingD [↩]