Yahoo announced its first quarter earnings after the bell yesterday. To put the company's predicament into perspective, compare the opening paragraph of the release with a dose of realism, sans rose-colored glasses.

"I'm pleased that we delivered Q1 results in line with our expectations. Our 2016 plan is off to a solid start as we continue to focus on driving efficiency, lowering costs, and improving long-term growth," said Marissa Mayer, CEO of Yahoo. "In tandem, we made substantial progress towards potential strategic alternatives for Yahoo. Our board, our management team, and I are completely aligned on this top priority for shareholders."

Saying that yesterday's announcement was "in line with our expectations" is like the captain of the Titanic cheerfully announcing that the ship is taking on water no faster than anyone thought after that collision with an iceberg. Here are some of the key numbers:

  • Revenue of $1.087 billion, before traffic acquisition costs (TAC, or the money Yahoo has to pay to owners of other sites to get traffic from them) was down 11.3 percent year over year.
  • Back out TAC and Yahoo's net revenue was $859 million. According to the Wall Street Journal, it's the first time quarterly revenue has fallen below $1 billion since Marissa Mayer became CEO in 2012.
  • Net earnings were a loss of $99 million.
  • The so-called Mavens revenue, which was Mayer's combination of ads from mobile, video, and Tumblr and Polyvore, as well as native ads, isn't growing anywhere near fast enough ($35 million year over year) to replace other revenue (down $98 million).

From the outside, it looks like Yahoo is coming apart at the seams. First there are the little gaps where the thread is wearing out. What comes next, gaping holes as the integrity of the property falls apart?

Yahoo gets a ton of traffic. It's just that the company long ago lost the ability to build a solid income stream on all those people coming by. After four years, Mayer hasn't even come close to accomplishing the turnaround that she wanted three more years to accomplish.

This is why Yahoo has been talking about selling itself off, a move that should have happened long ago. Had the board when Jerry Yang was last CEO taken up Microsoft's offer years ago of about $44.6 billion rather than holding out because the directors all knew the company was worth more, things would be a lot different. At least, the shareholders would be much wealthier.

But the board didn't and the shareholders aren't. There are bids in from Verizon (which has been beefing up its content and ad arm with actions like its acquisition of AOL), the U.K.'s Daily Mail, and private equity firm TPG Capital (which would likely want to strip out a lot more cost and then eventually sell off the parts that remain). But with Yahoo sinking quickly, these companies might reconsider their bids to take the new reality into account.

[UPDATE: The Wall Street Journal issued a correction that the Daily Mail is in talks with a private equity firm that did submit a bid. It may be TPG or there might be other bids not publicly known.]

Someone will end up with Yahoo. But they'll get it at a bargain price because the company's performance undercuts its ability to effectively negotiate. It's another example of how hubris eventually is shown to be empty when it comes to business. Whether overestimating the value of a company or of an executive's ability, finally someone has to put up and can't.

Published on: Apr 20, 2016
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