When I bought my first computer and got connected to the internet, Yahoo! Inc. (NASDAQ:YHOO) and AOL, Inc. (NYSE:AOL) were all the rage. At that time, people were just beginning to realize the potential of the internet, and Yahoo! Inc. (NASDAQ:YHOO) was the internet search engine of choice. As the years went by, Google Inc (NASDAQ:GOOG) came along, and is now the most popular search engine by far.
Yahoo!’s fourth-quarter earnings confirmed that it is making progress. In the fourth quarter, Yahoo! Inc. (NASDAQ:YHOO) had revenue of $1.34 billion, compared to revenue of $1.32 billion in the fourth quarter of 2011. Net income was $272 million, compared to net income of $295 million a year ago, and its earnings per share came in at $0.23 compared to earnings per share of $0.24 a year ago.
The best news from the earnings report was that Yahoo!’s quarterly and annual revenues were both fractionally higher on a year over year basis. The revenue increase was Yahoo!’s first in four years. Another bit of good news was that its total search ad revenue improved 3.8%, and its per-ad revenue strengthened 7%.
In addition, its gross margin of 69% and its operating margin of 16.1% were both industry highs. The final bit of good news was that the company finished the quarter with $4.2 billion in cash. The bad news was that earnings from its core business display-ads fell 3.5%.
The drop in display advertising revenues was considered to be particularly bad news, because it decreased Yahoo!’s portion of the U.S. market to 9.3% from 11% in 2011, while its chief competitor Google Inc (NASDAQ:GOOG) increased its market share by 2% to 15%, and Facebook Inc (NASDAQ:FB)’s market share came in at 14%.
Yahoo! Inc. (NASDAQ:YHOO) not only lost advertising market share to Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB), it lags behind its two top competitors in the important area of revenue growth. For instance, Google Inc (NASDAQ:GOOG) grew year-over-year quarterly revenue at a rate of 6.7% versus Yahoo!, whose year-over-year rate of quarterly revenue growth was 1.6%.
Facebook Inc (NASDAQ:FB) increased its year-over-year quarterly revenue at a rate of 40.1 %. The fact that a company like Facebook Inc (NASDAQ:FB) can increase revenues at such a rapid pace indicates that the business display advertising market is still wide open. Perhaps, with time, Yahoo! will be able to grow advertising revenues at a rate that is similar to Facebook Inc (NASDAQ:FB).
Yahoo!’s change in direction
It is very striking that Yahoo! Inc. (NASDAQ:YHOO)’s fourth-quarter earnings were nearly identical to those from last year. The same is true for its annual earnings. Its annual revenue was $4.986 billion in 2012, compared to $4.984 billion in 2011. The annual earnings per share differed, but only because of a one-time transaction.
It seems that Yahoo! is in a rut, treading water and unable to move forward. The company’s new CEO, Marissa Mayer, has plans to make changes that will get the company out of its current rut. In order to do this, she will have to address Yahoo!’s three biggest problems:
1. The time that users spend on its website: One of Yahoo! Inc. (NASDAQ:YHOO)’s biggest problems is that the time that users spend on its websites is “down a third from its high three years ago”. This has negatively affected their advertising rates.
2. Its lack of penetration into the mobile device market: Yahoo! currently has 200 million unique monthly users on mobile devices. This puts it in third place, well behind Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB). In order for Yahoo! to increase revenue, they will have to do better in this area. Yahoo! recently introduced a new Flicker app for Apple Inc. (NASDAQ:AAPL)’s iOS devices, which has been well-received and is a start in the right direction.
3. Its lack of a meaningful social networking site: This is an area were Yahoo! still has a lot of work to do. Marissa Mayer’s primary goal is to make Yahoo! a bigger player in the mobile internet industry. She has said “Yahoo will be one of — if not the — predominant platforms in the mobile era.” In the fourth quarter, she hired 120 new employees with computer science degrees. This move towards high tech employees fits into her plans to increase and improve Yahoo!’s smartphone apps.
New high tech employees will also help her improve Yahoo! Inc. (NASDAQ:YHOO)’s three most important internet portals, Yahoo! Mail, Yahoo! Finance and Yahoo! Sports. She ultimately hopes to make the Yahoo! websites fresher and more interactive. She also plans to provide Yahoo! users with a social networking experience, something that its web portals have not had. If Marissa Mayer is successful in improving the look and feel of Yahoo!’s websites, that will help the company improve upon its three major weaknesses.
The article Yahoo!’s 3 Biggest Problems Keep Holding it Back originally appeared on Fool.com and is written by Maxwell Fisher.
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