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Savings Experiment: Snow RemovalJeffrey Lindsay at Bernstein Research has some "tough love advice" for Jerry Yang at Yahoo! Inc. (NASDAQ: YHOO) Lindsay covers most of the large internet stocks and his work is followed closely in the financial press.
In a recent report, analyst Lindsay offers Yahoo! a game plan. First, Yahoo! should outsource search to Google (NASDAQ: GOOG). The company has considered that and decided against it. But, Google's search process is more efficient than Yahoo!'s, which yields higher ad revenue.
With the search function moved outside the company, Yahoo! could cut 25% of its staff.
The combined benefit of these two actions would add $1.2 billion in additional operating income a year, according to Lindsay. Yahoo!'s operating income in the last quarter was $185 million, so the improvement in the company's financial fortunes would be tremendous.
Although suggestions of radical changes at Yahoo! have been floating around since long before Yang moved up the CEO job a few months ago, no one has put an exact number on it the way that Lindsay has. If his calculations are even close to being correct, the suggestions are nearly irresistible.
All of Yahoo!'s recent actions have been modest. Several advertising executives have been replaced and the company is bulking up it ability to target display advertising. But, the display segment of online revenue is growing more slowly than search-related sales.
Wang has offered no program that will materially change Yahoo!'s share price. He needs to look at the best thinking from outside the company.
Douglas A. McIntyre is a partner at 24/7 Wall St.
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