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Bartz Says Her Yahoo Voodoo Is Working, but Revenue Still Heads South

Yahoo (YHOO) released its first-quarter earnings report and shares jumped 3 percent. Even though CEO Carol Bartz emphasized that the company "beat the midpoint of revenue guidance," the numbers are still headed down.

Maybe Yahoo is "solidly executing" its plan to return to "sustainable revenue and profitable growth," as the earnings release quoted Bartz, but that wording has gotten sort of stale. For some time, management has pushed on cutting costs to boost earnings. That doesn't grow the business. Even the company's focus on non-GAAP revenue numbers are actually a disguised form of cost cutting. When will the company actually find a way to increase its sales?

To understand what's going on at Yahoo, you have to examine its definition of non-GAAP ex-TAC revenue. TAC stands for traffic acquisition costs, because not all the company's traffic comes from its own sites and getting that traffic (and advertising) involves expenses. It seems like a reasonable measure, until you realize that it leaves a door open for some sleight of hand.

If Yahoo can cut TAC fast enough, whether by getting more of its traffic directly to its own sites or by cutting what it offers partners, it can make non-GAAP ex-TAC revenue look like it's growing, or at least not falling as quickly as actual GAAP revenue, as the graph below shows:

For example, GAAP revenue dropped by 24 percent from 2010Q1 to 2011Q1, and yet revenue ex-TAC dropped by only 6 percent. It's another form of trimming expenses. Over time, the revenue pattern has remained ugly, as this table from the Yahoo earnings presentation shows (click to enlarge):

Notice that TAC dropped by 86.5 percent? That's exactly the type of accelerated cost cutting that makes the non-GAAP revenue measure look healthier. Things get even more interesting when you look at the revenue breakout table (click to enlarge):

Bartz's hopes are pinned on display ad revenue, which was actually up by 6 percent. And yet, that was only true year-over-year. It was down 17.6 percent from the last quarter of 2011.

Search revenue is a disaster, particularly average revenue per search. Bartz tried to dismiss the issue, but there is no talking this away. The partnership with Microsoft (MSFT) that she engineered simply isn't doing what the company expected or needed. If it hadn't been for Microsoft's guaranteed underwriting of revenue, things would have been even worse. (Danny Sullivan at SearchEngineLand has detailed analysis of Yahoo's search business over time. The short take: Yahoo comes across as playing with numbers and words to blame others for problems rather than itself for longer-term trends.)

Furthermore, look at TAC for both types of ads. The huge savings has been in search, but that's where the revenue has the greatest problems. Yahoo has a much harder time dropping TAC in display ads because there simply isn't as much to cut.

Cash flow from operations was up 44 percent year-over-year, but that's comparing last quarter to a disaster. It's down significantly from any other quarter in 2010. Expenses without traffic acquisition costs (TAC) were well down, and that's good. And yet, Yahoo badly needs quarter-to-quarter revenue growth. The company's guidance for next quarter suggests revenue growth, but for non-GAAP ex-TAC revenue, not real top line revenue. Yahoo cannot cost cut its way into health. Without real revenue growth, it will go nowhere good.


Image: morgueFile user vilhelm, site standard license.
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