After turning in a middling batch of financial results for the second quarter, Yahoo is still organizing its comeback, but some analysts see light at the end of the tunnel.
The Web pioneer reported profits slightly ahead of Wall Street expectations yesterday, while revenues fell short.
But the real story continues to be Yahoo’s (NASDAQ: YHOO) potential to execute on its strategy to become the epicenter of the Web, a move which took a major step forward with yesterday’s launch of a redesigned home page sporting on-site access to some of the favorite destinations on the Internet, including Facebook and MySpace.
“Overall, given the still mixed signals on the macroeconomic picture and the fact that we remain in the early stages of the company’s turn-around, we were not displeased with the call,” Broadpoint AmTech analyst Benjamin Schacter said in a research note. “We think Yahoo’s strategy around an open portal, mail and key content verticals makes sense, but as always with Yahoo, it will come down to the execution.”
On yesterday’s earnings call, Yahoo CEO Carol Bartz said the company has “less fear” about the economic conditions that have been weighing on the advertising market, though she begged off making any predictions about when things would improve.
Barclays analyst Doug Anmuth called Yahoo’s results a “mixed bag,” but saw plenty of encouraging signs from Bartz and the company’s new CFO, Tim Morse.
“We continue to think Yahoo is focused on the right core products and initiatives, building better scalability and efficiencies, has a renewed sense of innovation, and is well-positioned to benefit from an eventual rebound in advertising,” Anmuth said.
But within the advertising market, Yahoo’s position could be in a bit of a transition.
Standard and Poor’s analyst Scott Kessler noted that “display advertising held up pretty well, but revenue per search was somewhat weak.”
Broadpoint’s Schacter saw something bigger going on.
The executives on yesterday’s call talked up Yahoo’s position as the leading online media company, touting its soaring traffic to key verticals such as news entertainment. Bartz spoke of Yahoo’s plans to reinvest in the company’s display ad platform and its goal of weeding out “irritating” ads that disrupt the user experience. But they had relatively little to say about search.
That “lack of discussion suggests Yahoo [is] not tied to the idea of being a principal in search,” Schacter said. “We still believe a Microsoft deal will happen.”
The long-deferred Microsoft (NASDAQ: MSFT) deal would likely involve the software giant forking over at least $1 billion for Yahoo’s search business, with additional payouts to come over time. That alliance would be aimed at positioning Microsoft to give Google (NASDAQ: GOOG) a run for its money in search, while Yahoo would enjoy an infusion of cash and double down on display, and continue to promote itself as “the center of people’s online lives.”
Yahoo’s executives didn’t offer any comment on the prospects of a deal with Microsoft on yesterday’s call, and analysts didn’t ask, save for a broad query about the firm’s general approach to deal-making.
Morse’s cryptic reply: “Who knows what events bring and what deals come our way.”
Schacter, echoing other analysts, said he continues to believe that a deal with Microsoft makes sense for Yahoo.
Microsoft is due to report earnings tomorrow after the bell.
