Yahoo’s Thompson Reiterates Focus On Core Business, Divestiture Plans

Yahoo (NASDAQ:YHOO) announced its earnings for the first quarter of 2012, with its net revenue (excluding traffic acquisition costs) increasing to $1.07 billion, up 1% year-over-year. However, its operating income declined nearly 11% as expenses increased much faster than revenue. While display advertising revenue declined again this quarter, search advertising revenue increased marginally, driven by higher revenue per search and high click-through ratios. Yahoo plans to continue to work with Microsoft to improve its search experience and drive advertiser ROI and revenue. ^[1]

However, the new Yahoo led by Scott Thompson finally seems to have a strategy to regain its footing and recapture lost market share in the global online advertising space where it competes with Google (NASDAQ:GOOG) and Facebook.

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Focus: Key to Yahoo’s Long-Term Success

Yahoo earlier announced its plans to restructure its business and focus on three main offerings – Media, Connections and Commerce. It also laid off around 15% of its workforce and expects to realize around $375 million in cost savings in the coming years. While restructuring expenses may weigh on its margins in the near term, we expect the new, leaner structure to lend itself to higher profit margins going forward. However, Yahoo may have to ramp up its R&D and marketing spend to go up against its primary competitors Google and Facebook.

In the earnings call, Thompson stated that the company will be shutting down nearly 50 properties which do not contribute meaningfully to its revenue in an attempt to direct all its attention to its core business. ^[2]

Going forward, if Yahoo is able to leverage its massive user base – more than 700 million users across all its online properties – and long-standing relationships with advertisers and partners and make a come back, it stands to benefit by better monetizing its digital content. Yahoo’s renewed focus on e-commerce could signal another turning point for the company.

Facebook, Lawsuits and Alibaba

Yahoo also touched upon its other recent adventures, including its lawsuits against Facebook for patent infringement. While it doesn’t materially impact Yahoo’s value much, it could lead to a settlement as Facebook’s IPO approaches.

Thompson also announced that Yahoo is continuing to pursue a discussion with Alibaba and may soon close a deal to monetize some portion of its stake in Alibaba, probably its best investment to date. The company may also offload some of its stake in Yahoo Japan to boost its cash reserves and enable it to focus on its core business.

We currently have a $18 Trefis price estimate for Yahoo, which stands nearly 20% above its market price. Yahoo’s stake in Alibaba accounts for around 38% of its total value while its search and display advertising businesses account for 15% and 12%, respectively.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Yahoo! Reports First Quarter 2012 Results, Press Release [↩]
2. Yahoo!’s CEO Discusses Q1 2012 Results – Earnings Call Transcript, SeekingAlpha [↩]