Marissa Mayer and the art of the earnings call
Conference calls discussing corporate earnings are often like political debates: An hour or so of jargon as dry as dirt. But much like the this year's presidential debates, Yahoo's earnings call Monday promised to be worth tuning into, if for no other reason that this was Marissa Mayer's first and best chance to make her case for reviving the company. And like the debates so far, Mayer did not disappoint.
Before the call, Yahoo said its revenue rose 2 percent to $1.09 billion while its net profit was 35 cents a share. Two percent revenue growth pales next to the 45 percent growth Google saw last quarter. But it was slightly above what analysts were expecting. And the net profit of 35 cents a share was significantly above the 26-cent forecast.
Those headline numbers were enough to send Yahoo's stock up 3 percent only a few minutes after it announced its earnings. An hour later, after Mayer began to talk about Yahoo to investors, the stock gained some more, inching up another 1.5 percent to $16.45 a share.
An investor cheered by Yahoo's earnings surprise was being rash. Because a deeper look inside Yahoo's numbers showed display-ad revenue, its bread-and-butter business, didn't even grow over the past year. Because operating income actually fell 14 percent to $152 million in the quarter. And mostly because what interests everybody about Yahoo these days isn't what the company has done during the past three months, but rather what Mayer is going to do in the next year or so.
I have listened to countless earnings calls over the years, and I've noticed a couple of clear trends. One is that if a company has been enjoying stock gains, the CEO can afford to be evasive about answering questions (I'm looking at you, Mr. Bezos) and get away with it. The other is, if a company is in any way on the defensive, the CEO will benefit by being as forthright as discretion allows.
This is where Mayer performed well. And this is why the 1.5 percent rise that Yahoo's stock saw during the earnings call is more significant than the initial 3 percent bump on the headline numbers. Yahoo refused to give any guidance on what earnings would be in the coming quarter because its CFO, Ken Goldman, is so new to the job. Normally, withholding guidance can hurt a company's stock. But instead, Yahoo investors warmed to the stock as Goldman and Mayer talked.
Goldman repeatedly deferred to Mayer when analysts asked him questions. In turn, Mayer was evasive in her own way. But each time she avoided a direct answer she still offered analysts some sort of consolation prize. In the game show that earnings calls have become, in which analysts are used to walking home empty-handed, this was a welcome surprise.
The elephant in the conference call was display ads, long an area where Yahoo has ruled. Research firms expect Yahoo's share of search to keep declining. Display revenue has been flat to shrinking for the past five quarters. But search revenue has been growing for the past three quarters, including 11 percent growth in the most recent quarter.
The easy answer would be that Yahoo's search alliance with Microsoft was finally kicking in. But Mayer's answer was different. After admitting Yahoo's search share was “challenged,” she both praised Microsoft's role as a partner and discreetly expressed displeasure about the revenue split. “We're happy working with Microsoft,” Mayer said at one point. And yet later: “There's some disappointment in monetization.”
That prompted one analyst to ask whether Yahoo would bolt to another search provider once its search agreement with Microsoft expires. Mayer said Yahoo would continue to work with Microsoft, but that “some elements are going to continue to be challenging.” Then she said that any gains in revenue per search and cost per click “have come from changes in user interface.”
In other words: We're fixing search by ourselves. And Microsoft, you can pay us for that, or we can find another search engine. To drive the point home, Mayer talked more about how Yahoo was working on integrating search throughout its site as well as its current and future mobile apps. This is one way to spice up an earnings call: Reformat it as a "Dear John" letter.
Another analyst asked whether Yahoo was “overmonetized” in display ads – that is, whether (like Facebook) users are blasted by a fire hose of banner ads they wouldn't have time to click on in a lifetime. Mayer responded that Yahoo would remove ads if they are “disruptive” to a reader's experience. That is, if removing them makes the page more readable.
Overall Mayer emphasized, somewhat reassuringly, that Yahoo wasn't pivoting as much as it was improving on its existing strengths. Not just search, but mobile apps, communications like email and messenger, and core features like sports and finance.
This is welcome news, because the interface of Yahoo Mail is a big step backward from where it was in 2005. And because Yahoo could be a must-read in consumer finance if it made its massive data more easily accessible, and if it also made a few strategic purchases like YCharts.
And then there's mobile. Mayer said a lot of the right things here, but questions linger. She boldly boasted that Yahoo's lack of a mobile operating system is an advantage, but try persuading Apple and Google of that argument. On the mobile Web, platform is destiny. Facebook conceded as much when Apple integrated its social network into iOS 6.
Overall, this was a good day for Yahoo, and its new CEO. The bigger question is whether it signals a turnaround in the company. Mayer is doing a lot of things right. She's made several smart hires, what she called her “dream team” in the fantasy sports of business. She placated antsy investors (many of whom are Yahoo employees) with the Alibaba deal. And she instinctively knows how to manage an earning call in a way that should make Larry Page blush.
But as important as an earnings call is, and no matter how masterfully you handle it, it's not enough to succeed. It's PR for your investors. You can use the earnings call to draw the attention of people toward crucial truths about your company, or you can use it to distract the people who own you from the same crucial truths.
Here are the crucial truths about Yahoo.
-Facebook and Google are killing it in display ads, which remains a growing business. And Yahoo isn't.
-Search is still a growing business too. But in pure financial terms, the only reason Yahoo's search revenue is growing for now is because of a contract with Microsoft that guarantees it regular payments.
-Mobile is the future, but that future belongs to the companies that run the mobile OS, not a mobile-app factory. Yahoo wants to be a cross-platform app factory.
-Local is also the future, but the rare question Mayer brushed off was one about the company's ambitions in local.
-Yahoo could have amassed a huge cash stockpile for acquisitions. But it gave $3.7 billion of its $4.3 billion, leaving $650 million for its own operations. Mayer said that Yahoo will focus on acquisitions in the tens or hundreds of millions of dollars. So no Instagram deal for Yahoo.
-Which makes some sense. Except that Yahoo also took out a $750 million credit facility for “general corporate purposes.” Which means, among other things, M&A deals. So why take out a loan to get money you already raised from the Alibaba transaction?
I've said it before. Mayer is a CEO capable of running a successful company. But she chose to run Yahoo, which may be so far gone it can't be revived, especially with an activist investor hovering over it.
It's great hearing Mayer say all the right things about Yahoo's future strategy. But sometimes saying all the right things can be negated by all the wrong things you have to overcome.
(Image courtesy of LeWeb11 on Flickr)