The Daily Interview: Yahoo! Isn't Worth an Exclamation Point Yet

(This interview was conducted by phone Wednesday evening.)

Yahoo!(YHOO) eked out a tiny profit for the first quarter, beating lowered expectations by a nose. The blue-chip Internet company also warned of a rough road ahead and pulled the trigger on layoffs. Yahoo, whose recent push into porn has been making headlines, also stressed how it is diversifying its current reliance on online advertising for 85% of its revenues by starting to charge customers for premium services and developing co-branded corporate Web sites.

Jeffrey Fieler Managing Director Consumer Internet Research at Bear Stearns

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Is this any reason for investors to be titillated?

Jeffrey Fieler, managing director of consumer Internet research at Bear Stearns, hardly thinks so. Fieler says these new profit centers will take time to develop. In today's Daily Interview, Fieler says YHOO isn't like to rise from its 90% decline to $17 any time soon.

TSC: Do you think Yahoo provided the investment community with good visibility on today's earnings call?

Fieler: The good news was that they don't expect to see the run-rate for the company go below where they were in Q1 of this year. After three quarters in a row of dramatically lowering expectations, today's call was basically, "It's not getting any worse." That was the good news.

The bad news was that Yahoo! doesn't expect growth in the back half of the year, either. This is why they said they are cutting their workforce 12% in attempt to get it in line with the revenue run-rate.

That was the bitterness to today's sugar, if you will.

TSC: Since it's been called an "Internet bellwether" stock, what does Yahoo!'s break-even situation mean for other dot-coms?

Fieler: Yahoo!'s break-even report was probably very important for every Internet company except AOL Time Warner(AOL), which has become a multimedia company.

Other players in the Internet space have an even worse position than Yahoo! because none of them have the 192 million users that Yahoo! has. You'll probably see those companies have dramatic declines this quarter.

TSC: Chairman and CEO Tim Koogle attributed a great deal of his company's difficulties to the economic slowdown. Is this an acceptable excuse?

Fieler: The comment is partially acceptable, but not entirely. Yahoo! came up with its own estimate of how much the sequential change was quarter over quarter. My numbers are actually halfway between the analysts' numbers and the company's, showing a 44% sequential decline. That is far greater decline than the 15% to 20% decline that most traditional advertising-based businesses are seeing in the off-line world. There have to be factors other than the economy contributing to Yahoo!'s difficulties.

I think they overstated the economic impact somewhat.

TSC: Did it strike you as odd that the company is cutting back on its workforce when, at the same time, it claims it has found a profitable business model?

Fieler: What struck me the most was that the company has $1.7 billion in cash. Yet they are cutting 12% of their workforce to save $8 million a quarter, or $32 million a year. My question is, why they would go through the turmoil of a big layoff when they think their business is going to grow longer-term and they have all those reserves?

TSC: Do you think Yahoo! is doing enough to diversify its revenue?

Fieler: Diversifying away from advertising is a major and important thrust that investors were listening for in today's call. Right now it's about 85% of Yahoo!'s revenues.

However, there's a significant time-lag between introducing those new services and getting sizable revenues from them. What we heard on the call today is that there won't be significant revenues from premium or business services in 2001, but in 2002 and beyond.

Going forward, investors should be asking Yahoo!, "OK, you've got 15 premium services. Let's talk about the revenues and the number of your 67 million active users who have signed up for one or more of these premium services." That's going to be the tough part.

The news was mildly positive. I don't think you'll see the stock move broadly [Thursday] in either direction.

TSC: What are these premium and business services?

Fieler: Yahoo is essentially entirely free services. The premium services will be services residing on top of the free level that they are trying to get people to pay for -- everything from electronic bill payment, to the market tracker that they introduced last week, to this new Sony-Universal music subscription service to enhanced e-mail with more memory. The business services are co-branded websites.

TSC: How can a company with nearly 200 million users and 1 billion daily page views not make money?

Fieler: Well, they made $900,000 EBITDA , and they made four times that in cash [earnings per share]. (Laughs.)

The problem continues to be that most of that consumption is for free. All those users are there, but they are not paying to be there. The onus on the company is to extract value from those numbers and that traffic. If you want to know why there is such a management turnover, it's because the business model is changing to focus on these profit-making premium and co-branded sites.

TSC: Koogle also mentioned direct marketing and cross-promotions. What is Yahoo! doing in this area and how important is it?

Fieler: Direct marketing and cross-media marketing promotions are very important. Branding advertising seems to be the one area of Internet advertising that companies are turned off to right now. But they still see the Internet's promotional value.

If you look at what Pepsi(PEP) did on the Internet last fall with the mypepsi.com promotion, or what they did with Britney Spears, that's not branding advertising, that's promotional. And that's really where people are putting their dollars. Letting companies and corporations have a co-branded site really differentiates Yahoo!, because Yahoo! has a strong brand to bring to such a promotion.

TSC: The company is looking to find a new CEO to fill Koogle's shoes. Do you have any advice for Koogle's eventual replacement?

Fieler: With the stock where it is now, there isn't a lot of pressure for the company to perform in the next quarter. There aren't high expectations built into it.

My advice would be, take your time to make sure you've got the long-term strategic pieces right. If the guy who comes in can leverage the platform right, he will go down as one of the greatest business heroes of the 21st century.

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