What Yahoo! Could Do to Soothe Investors' Nerves

NEW YORK ( TheStreet) -- Yahoo! ( YHOO) will report its earnings this afternoon.

You shouldn't expect much in terms of the actual results. Investors will care about what the company says about its future.

This will be the first earnings call for Scott Thompson, the new CEO, since he's been in the seat for a full quarter. From now on, he owns all the results.

We have had an announcement of 2,000 job cuts two weeks ago and a company-wide reorganization last week.

As part of its earnings today, it would be surprising if Thompson didn't try to kitchen-sink these results. That means he'd be smart to take as many one-time write offs as he can related to the layoffs. If there's bad news about the outlook for the core business (relating to display ads or search or both), now would be the time to spring it on the market. Get all the bad news out there.

From Google's ( GOOG) call last week, we know that their cost-per-clicks (CPCs) were down 12% in the quarter (Y/Y), even though paid clicks were up. We also know that Yahoo!'s absolute number of queries dropped in the last quarter, as per a third party study. Put it together and it's likely we're going to see more weakness from Yahoo! search in the quarter -- which has been a trend since Yahoo! signed the outsourced deal with Microsoft ( MSFT) in 2009.

In display, it's likely going to be another quarter of treading water for Yahoo! Hopefully, there are some signs of strength in the new year. 2012 is going to be the year where we discover whether advertisers are meaningfully moving ad dollars to Facebook or if they were just dipping their toes in the market in 2011, when they hurt Google and Yahoo!

So, what could Scott Thompson say or do to soothe the nerves of investors?

Something has to happen in search. Yahoo!'s search queries are shrinking. The results of the partnership with Microsoft have been underwhelming for investors. It could renegotiate terms with Microsoft: announce it is abandoning Bing for Google and why that will be possible with the DOJ; announce it is shutting down search with an explanation of why that will benefit the company in the long run; or announce -- along with Microsoft -- that Facebook is taking over Bing, and Yahoo! will partner with Facebook as part of this.

Of course, if that were an option being pursued, there would also likely be a settlement announced with Facebook about the patent lawsuit and granting Facebook a right to use the Overture/GoTo.com patent.

Selling under-performing businesses. It is rumored that Yahoo! will get rid of its ad technology Right Media business. If it does and can get back several hundred million dollars, it will be a win for investors. Hopefully, there are other businesses within Yahoo! that can be sold off for more cash and to reduce headcount and increase focus.

Specifically map out how Yahoo! will win in data and payments. It's not enough anymore to say that Yahoo! has 700 million users each month and therefore can make a lot of money from "data." How are they going to make money? When are they going to make money? More details please.

More headcount cuts. By my estimate, Yahoo!'s got 17,000 people working for it full-time or on contract since the layoffs two weeks ago. That's still way too many. If they got rid of ad tech and really shut down its internal search group, that would be another 3,000 people. The truth is that Yahoo! could go even deeper than that.

A patent deal with Facebook. Some expect a big settlement with Facebook where Yahoo! gets a chunk of Facebook stock pre-IPO just like it did with Google in 2004. It doesn't appear that Facebook wants to do that though. Although a lot of money dropping on your lap is always a good thing, shareholders are likely to be just as excited if the two can agree on an ongoing relationship between them for traffic referrals, annual revenue payments to Yahoo!, and licensing of Yahoo!'s patents including the search patent.

Yahoo! shareholders would love to hear that the company was hooking its wagon to Facebook's. Facebook would love to get its hands on Yahoo!'s users and monetize a lot of them. What if Yahoo! agreed to use Facebook Payments as its default pay service? It could be a great way for Facebook to encourage other third parties to use it versus PayPal or whatever Google is going to do with its Wallet program. Yahoo! investors would eat it up.

Chart out the strategy for the core business. Even though Thompson has this reputation for being a tough talker from Boston, he hasn't said much about what he's going to do yet and we're getting close to his 90-day mark. The longer he waits, the more he makes himself a target for Dan Loeb from Third Point in the proxy battle. Therefore, I'd expect he'd start to pipe up more with some details on what he's going to do on the call today.

We will see what happens on the call. I expect analysts will ask for an update on the talks with Facebook, Alibaba Group, and Softbank, but that Thompson won't have much to say.

At the time of publication, Eric Jackson was long YHOO.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.

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