Yahoo! Inc. (YHOO): Where’s Its Direction?

Yahoo! Inc. (NASDAQ:YHOO)‘s most recent quarterly earnings may have topped estimates, but the company did not show any improvement in ad revenues. In fact, in this quarter, search has made a bigger contribution to the top line than ads. The latest ComScore data has shown that Yahoo! Inc. (NASDAQ:YHOO)’s explicit core search market share has slightly increased. But the company’s overall revenues have fallen, and even a rising bottom line cannot hide an eroding core ad business.

Going through the earnings numbers, Yahoo posted a 36% increase in profit to $390 million or $0.35 per share up from $0.23 per share in 2012. Total revenue dropped by 7% to $1.1 billion from last year while revenue excluding traffic acquisition costs remained flat at $1.07 billion.

Display advertising has defined Yahoo! Inc. (NASDAQ:YHOO) for years. It is the company’s reason for existing, but this quarter fell by 11% year over year from $454 million to $402 million. Meanwhile, search revenues overtook display advertising, with revenue there increasing from $384 million to $409 million. So, is Yahoo an advertiser or a search provider? At this point it is neither.

Those numbers are borne out in the breakdown of the two segments. Yahoo! Inc. (NASDAQ:YHOO)’s total number of ads sold fell by 7% along with prices per ad falling 2%. Paid clicks increased by 16%, while price-per-click decrease by 7%. Google Inc (NASDAQ:GOOG) is seeing similar trends with its paid click revenue breakdown. Clicks are up 20% year over year, whereas cost-per-click dropped 4%. Google Inc (NASDAQ:GOOG) can afford to live with this as it has its hands in a number of potentially disruptive technologies, obviously.

Better news for Microsoft

The latest ComScore data, while mildly encouraging for Yahoo! Inc. (NASDAQ:YHOO), is a far better report for Microsoft Corporation (NASDAQ:MSFT) than anyone else as Bing begins to get real traction with the release of Windows 8 and rising profile of Windows Phone. Microsoft sites have cannibalized even Yahoo’s search business. So, while this uptick in search volume is good, Yahoo has a long way to go to create search and advertising density. And that is, frankly, not going to happen.

Since the arrival of Marissa Mayer at Yahoo, its stock has risen by more than 50%. But how much of that is due to Mayer’s hand and how much of it is due to the company finally unlocking its assets? The recent price hike was a result of rumors surrounding the IPO of the Chinese e-commerce behemoth Alibaba, in which Yahoo! Inc. (NASDAQ:YHOO) holds a 24% stake. And this is the key to the company’s future. Hope springs eternal that it can sell its Alibaba stake, raise some cash and remake the company.