Yahoo needs more than a facelift

Revenues declined from $1.8 billion to $1.6 billion over the same period.

Eden Zoller, principal analyst at Ovum, said the company's revenues were hit by the general industry decline in advertising spend. This made it even tougher than normal to grow revenues and market share, particularly when the main competition in Google is getting stronger.

"The modest 8 percent uplift in profits is commendable but not that surprising given the stringent cost-cutting that Yahoo has been pursuing over the last year, which has seen layoffs and the closure of certain properties," he said,

"With the net effect that operating expenses have reduced by close to $150 million since the second quarter of 2008.

"In fact, alarm bells would have sounded loudly had Yahoo not posted improved margins after such efforts."

Ovum believes future earnings look set to come under yet more pressure as the company has indicated that it will increase spending by around US$75 million in the third quarter to fund further investments in its technology platform and improved marketing campaigns.

The new-look Yahoo home page goes live in the US this week, followed by the UK, France and India, and is the first major revamp since 2006.

Zoller said the thrust behind the redesign is to make the Yahoo home page more like a personal portal or dashboard, and toward this it has introduced a number of personalisation features.

"The main one being a 'My Favourites' box where users can integrate popular applications such as Facebook and Twitter, a nice touch," he said.

"When they hover over the application a pop-up window appears allowing them see the latest news, make updates to Twitter and so on.

"Yahoo will also be introducing advertising in the My Favourites windows, no doubt hoping that the contextual nature of this placement will boost revenues."

Yahoo might not pull in the advertising revenues like Google but it is a popular website with consumers. Comscore places it as the second most trafficked property in the US, with its combined sites drawing 154 million US visitors in June, said Zoller.

"This is not far behind Google, at 157 million," he said.

"The redesigned Yahoo home page is clearly at attempt to close the popularity gap.

"We have not reviewed the new Yahoo home page, but it appears to have introduced some pleasing if not unique features and created a potential new advertising hook."

 Ovum believed this was positive but not enough to turn Yahoo's fortunes around.   

In that context it was not a huge surprise that the Yahoo-Microsoft dance had picked up again, said Zoller.

"The two companies have been in on-off talks about some sort of partnership for some time, which culminated last year in Microsoft putting in an offer of around $47.5 billion to acquire Yahoo, which Yahoo rejected," he said.

"The latest talks seem to be focused on partnership rather than full merger, which we think makes better sense," Zoller said.

"A partnership where the line of sight is 100 percent focused on driving advertising revenues is likely to be more effective than an all-out merger."

This would put a drag on resources and focus in the short term as two very big companies grappled with the huge task of combing and streamlining assets, said Zoller.

The simple line was that a combined Microsoft and Yahoo would prove a force capable of giving Google a run for its money, he said.