Yahoo! reported its Q2 2011 earnings today and said that revenue after traffic acquisition costs (revenue ex-TAC) was $1.07 billion - a 5% decrease from 2010's Q2.  Also, "Income from operations increased 9 percent to $191 million in the second quarter of 2011, compared to $175 million in the second quarter of 2010."  Read the release (PDF). And, get the earnings slides (PDF). Revenues were slightly below, and earnings appeared to meet, Wall Street expectations according to data gathered by Kara Swisher of All Things D.

Display Hits A Bump

Bartz claimed that new sales leadership has meant new strategy rather than just sell reach and scale.  Therefore, the sales team "sells customized, audience-based, solution-oriented programs across multiple devices."  She said field sales are "staffed back up" to levels of six months ago.

It's about custom, custom, custom for a large publisher.  Though it makes sense, until Wall Street sees real changes in revenues (Bartz said late 2011 and 2012), today's reasoning will be seen as hot air until the proof is in the revenue number pudding.

Bartz added that display will be below 13-16% growth estimates going forward - now "mid-single digits."

Looking at Q2's display numbers, $467 million ex-TAC display revenues showed a 5% increase year-over year. About the shortfall to the original estimates, the weakness was in the U.S. according to Yahoo!. Later in the Q&A portion of the earnings call, Yousef Squali of i-bank Jefferies asked if there was a sudden shortfall in display at the end of Q2 for Yahoo! since the company had led investors to believe everything was on track at the May Investor Day meeting. Yahoo! CFO Tim Morse pretty much said that was the case - though he didn't say it explicitly.

Interestingly, and backing up the story to have the sales team ramp, Yahoo! said it had ad inventory available for premium rates.  It wasn't about reduced traffic to Yahoo! owned-and-operated websites as it hit expectations according to Morse. He added that unsold premium inventory was were instead run through the exchange at far lower prices.

This suggests the question - Do you think the buyers knew they could get premium inventory through Right Media Exchange? If they can buy it for cheap through the exchange why buy through the direct sales team?  Was this the issue? Read on...

Questions from Wall Street Analysts began with Right Media Exchange momentum and when the effects of the new sales team and efforts will be felt. Bartz answered that Class I remains most important and that headcount/staff-up will help drive custom efforts.

She also reitereated that the company is spending a lot of time internally to understand what real-time bidding's impact is on premium inventory. It sounded as if the company is still skeptical about RTB (even though, as many know, there are pilot RTB programs on RMX today).

JP Morgan's Dough Anmuth asked about premium ads running through the exchange and how difficult it would be to move advertisers out of the exchange and back to direct sales.  Bartz clarified premium inventory did not run through the exchange which appeared to contradict what Morse said earlier in the call.

Also of note, several times Morse and Bartz stressed the lower prices of the exchange - but not that it was a good or bad thing necessarily. Nevertheless, it's hard to make the case for it being a good thing when your display revenues are sliding. In answer to another question, the pricing spread between exchange and premium inventory was said to be “a few times” in difference according to Morse.

Analysis

What happened? Yahoo laid a display egg in its premium ad inventory and that may have to do with a new sales team. Also here, Right Media Exchange may have done very well – The company did not break out these revenues. They could have said that display was down in both premium and the exchange but instead said it was down in premium/direct and that "lower prices" happened in the exchange. No real sense of volume. Coulda been up. Ultimately, don't know.

It would seem that Yahoo! is ripe for some sort of (better) pricing floor strategy with its unsold Class I/premium display that might include limiting display to house ads rather than re-selling to advertisers on the exchange. Even though the company said on the call that the advertisers are different on the exchange than in its direct channel, that would seem unlikely across all of its advertisers. There must be some overlap considering all the brands buying through DSPs and ad networks these days which in turn buy through Right Media.

Yahoo! needs some good display revenue news in Q3 and, especially, Q4. The pressure is on Ross Levinsohn and his new 5:1 sales team as well as the rest of direct sales crew at Yahoo!. Given the generally accepted principle that Yahoo! inventory performs extremely well for advertisers compared to other inventory out there, this may help.

A replay of the call will be available here.

By John Ebbert