Yahoo, Investors Shout.

By David Gaffen
The Wall Street Journal

Investors have had a euphoric reaction to Yahoo's earnings in trading Wednesday — after the company surpassed analyst expectations with its report, despite the poor outlook for display advertising in the weak economic environment.

But the company's losses and coming challenges put the analyst community in a Missouri mood. Multiple Wall Street researchers, in commentary said they were taking a wait-and-see approach as the company's new CEO, Carol Bartz, sets the company's direction and after the company declined to provide annual guidance for the first time.

For the quarter ended Dec. 31, Yahoo reported a loss of $303.4 million, or 22 cents a share, compared with year-ago net income of $205.7 million, or 15 cents a share. However, excluding certain items, the company earned 17 cents a share, which surpassed the 13-cent consensus, according to Thomson Reuters.

Without guidance, analysts are left to their own devices to estimate how 2009 will turn out, and current expectations are for revenue of about $5.4 billion, a figure that analysts at Signal Hill say should decline. "We think fundamentals will be under pressure for the foreseeable future due to its heavy exposure to the display advertising market," they wrote.

Ms. Bartz, in her first conference call as CEO, said she did not take over to sell the company, though a deal to sell its search business to Microsoft is still considered a strong possibility. Some believe the company is unfortunately operating from a weak position, though.

ThinkEquity analysts wrote that "we see a search-only deal as unlikely, given the potential risks to Yahoo!'s display sales leadership and its display platform roadmap over the longer term." They advocate a sale of the entire business to Microsoft, or the reverse — a sale of Microsoft's search traffic "or the entirety of MSN" to Yahoo.

Yahoo Manages Short Term Surprise

In founder Jerry Yang's first quarter as CEO, Yahoo! managed to surprise investors on the upside, by sending its stock up 9%. Although net income at Yahoo was down 5%, sales rose 12% driving quarterly net income to $1.8 billion before expenses. These earnings are much better than projected yet Yahoo the former undisputed kings of keyword search still face many challenges. Jerry Yang made sure to drive home that his mindset and focus is on the entire $45 billion online advertising market, not just keyword search a "lucrative subset of it".

Jerry Yang is stressing that Yahoo intends to be more active with "one-off services" around the world that will be cut off, much as Yahoo did in folding Yahoo Photos into Flickr, shutting down the revenue losing, resource draining, and clearly unpopular Yahoo Podcasts, as well as deemphasizing subscription-based music services and online tickets services in favor of ad-supported music programs.

Yahoo president Sue Decker says that Yahoo Panama, the much-delayed search ad system, is beginning to work. Revenue per search category was up 20%. And display ad revenue was also up 20% a rare acceleration after more than a 15 months of downward trends. No mention was made concerning declining PPC conversion levels or any new, sustainable click fraud prevention measures.

Yahoo executives stress that YHOO is more focused than ever on becoming the first stop for most people online, and will try to facilitate connections between people only as it supports the Yahoo starting-point strategy.

Given that social networks such as Facebook are increasingly the starting point for many people online, as well as Yahoo's previous emphasis on connecting users with other people and their passions, it is not clear what Yahoo's next steps are in the emerging social networking arena.