Google versus Yahoo - A tale of two cities

Google Inc. (NASDAQ: GOOG) and Yahoo Inc. (NASDAQ: YHOO) are two of the 20 innovators of The Innovation Index.

“Google's sites had 528 million visitors worldwide in March 2007, a 13 percent gain from the same month a year ago, according to ComScore Inc.. Microsoft had 527 million, while Yahoo had 476.3 million, the researcher said.

The popularity of searching the Web and new sites such as YouTube helped Google grow faster than both its biggest rivals. Products such as the Gmail e-mail service, an online calendar and an online payments system are drawing users even though they aren't nearly as popular as Google's search engine.”

Google already is the most-popular Internet search engine, drawing 48 percent of U.S. queries in March 2007, according to ComScore. Sunnyvale, California-based Yahoo was the most-visited U.S. Web site in February and also had the most repeat visits of any Web site.

In March 2007 I wrote a report on Can Yahoo Catch Google? after Yahoo had recently launched Project Panama, Yahoo's answer to Google AdWords and the making of a better search mechanism.

In the last two weeks both Yahoo and Google announced their earnings for the latest quarter. Project Panama had not yet impacted Yahoo's topline revenue; however, Yahoo officials are hopeful that Panama will have some impact in 2007. The question from the investors and analysts looms is how much impact Project Panama will have when the dust settles.

When one examines the growing gap between Yahoo and Google in terms of quarterly revenue, quarter over quarter revenue growth, quarterly net income, quarterly net profit margin, yearly innovations and stock performance gains, the picture becomes increasingly clear. Google is unstoppable at this juncture! And as of recent quarter's earnings announcement, Google has achieved another historical milestone vis-a-vis Yahoo, a first in its storied existence -- The Quarterly Revenue Gap between Google and Yahoo doubled -- Or to put in simpler terms: Google's quarterly revenues are now more than double Yahoo's quarterly revenue. 2007 will mark the first year when Google's revenue and profits will more than double Yahoo's. It's not just revenues. Google has widened the gap in Quarter over Quarter Revenue Growth, Net Income, Net Profit Margin and Stock Performance. Only the volume of Innovations or Gross Innovations is an area where Google and Yahoo seem to have some parity. Which brings me to the central point: Are sheer number of Innovations (total innovations) a leading indicator on how well a company is growing, or poised to grow? Alternatively, one has to really examine under the hood and look at not only the actual number and type of new products introduced, new collaborations and acquisitions, but also current market leadership and execution to understand how well the company is growing.

Google versus Yahoo Total Revenue Comparison

In the latest quarter ending March 31, 2007, Google had revenue of $3.66 billion; Yahoo had revenue of $1.67 billion. The Revenue Gap (Google’s revenue minus Yahoo’s revenue) between Google's and Yahoo's revenue: a whopping $1.99 billion. The Revenue Gap between Google's revenue and Yahoo's revenue is now more than all of Yahoo's revenue. This is significant! Compare this to the quarter ending March 31, 2006, or a year ago, where Google's revenue was $2.25 billion to Yahoo's revenue of $1.57 billion, or a Revenue Gap of $687 million. Importantly, the Revenue Gap a year ago was only 40% of Yahoo's revenue. Google is widening its lead by leaps and bounds over Yahoo, and at current average growth rates for both companies, Google revenue will be at least three times Yahoo revenue for March quarter in 2008. Sobering indeed.

Google is growing strong not just within the U.S. but also internationally. Google Revenues from outside of the United States totaled $1.71 billion, representing 47% of total revenues in the first quarter of 2007. Finally, Google’s partner sites generated revenues, through AdSense programs, of $1.35 billion, or 37% of total revenues, in the first quarter of 2007. This represents a 45% increase over network revenues of $928 million generated in the first quarter of 2006 and a 12% increase over fourth quarter 2006 revenues of $1.20 billion.

Google versus Yahoo Quarter over Quarter (Q/Q) Revenue Growth Comparison

The actual reason behind Google's insurmountable revenue position over Yahoo is owing to the quarterly revenue growth rate of Google. Google has averaged a quarter over quarter revenue growth of 12.99% over the last four quarters. This means, every quarter, Google's revenue grows over 12% from the previous quarter's revenue on an average. For instance, Google added $458 million in new revenue in the latest quarter from previous quarter's revenue. On the other hand, Yahoo has averaged a quarter over quarter revenue growth of only 1.7% over the last four quarters. Yahoo is growing, but growing quite slowly. Google is growing, growing quite rapidly. Hence the larger Revenue Gap. What is even greater is the Quarter over Quarter Revenue Gap growth between Google and Yahoo. Every quarter, the Revenue Gap between Google and Yahoo is growing 30% or higher. First, the current Revenue Gap is greater than Yahoo’s total revenue; now, the Revenue Gap is growing 30% plus each quarter; this means every three quarters, the Revenue Gap will double.

Google versus Yahoo Net Income Comparison

To many financial analysts and investors, total revenue or total sales alone are not a key metric. They look at net income, net profit margin, and earnings per share. Google has increased the lead over Yahoo in net income as well - the net income of Google is seven times that of Yahoo. Just a year ago, Google's net income was $592 million versus Yahoo's net income of $160 million, a difference of $432 million or less than four times. In the latest quarter, Google's net income is an astonishing $1.002 billion versus Yahoo's net income of $142 million, a difference of $860 million, more than seven times. Google was making more money than Yahoo a year ago; now, it is double that amount. Importantly, Google is adding a billion dollars in savings each quarter, which allows Google to create huge acquisitions such as YouTube in 2006 ($1.65 billion - although this included cash and stock) and DoubleClick in 2007 ($3.1 billion - all cash). Yahoo on the other hand has to be content with smaller or no acquisitions, and cannot invest heavily into new innovations. Yahoo just announced acquisition of Right Media, an online advertising auction site, for $688 million (cash and stock).

Google versus Yahoo Net Profit Margin Comparison

Another barometer of a company doing extremely well and putting more money in the bank is net profit margin, i.e. net income after paying income taxes as a percentage of total revenue. Google has averaged net profit margins of over 28% in the last five quarters; compare this to Yahoo's average net profit margin of just over 9%. Google's net profit margin is more than three times Yahoo's net profit margin. Yahoo has to work three times harder than Google to make the same amount of profits. Or Google has to work three times less than Yahoo. This means Google is running a highly efficient, operationally sound, profitable machine; Yahoo is doing good, but not as well as Google. Either Yahoo has to become more efficient (bottomline), or create a whole lot more revenue (topline) to really catch Google.

Google versus Yahoo Innovations Comparison

About the only area where Google and Yahoo are somewhat equal are total innovations. In 2006, Google had a total of 75 innovations including 44 new products, 25 collaborations, and 6 acquisitions. Yahoo meanwhile had 77 innovations in 2006, including 38 new products, 37 collaborations, and 2 acquisitions. In 2007, Google has kept up the pace with 26 new innovations through April 27, 2007, including 14 new products, 10 collaborations, and 2 acquisitions; Yahoo on the other hand has 24 new innovations, made up of 12 new products, 12 collaborations and 0 acquisitions. On surface, both Google and Yahoo seem to have the same pace of innovations. Why then Google is doing so much better in all the metrics above? Three reasons: 1. Quality of innovations 2. Meaningful acquisitions 3. Execution on current strategy. For instance this year, Google was able to acquire DoubleClick in an all cash deal for a huge amount of money; for Yahoo, this would have been difficult to swallow. Google's AdWords and AdSense are head and shoulders above Yahoo's Text Search solutions - Panama has narrowed the gap somewhat, however, Google continues to introduce new elements such as the recently announced WebSite Optimizer. Yahoo is quite fond of collaborations as a way to create a larger ecosystem and grow the business, and consistently leads Google in new collaborations. However, as with all partnerships, so much is not under your control, and there is a high dependence on how well your partner will do for you. Google has done well with the AdSense partnership program, and has built a mass of content partners all around the world - Google's partner growth is viral now. Yahoo has taken an early lead on the mobile platform though, and is betting that mobile is where the games will be played in the future.

Google versus Yahoo Stock Performance Comparison

Google stock has appreciated 16% since December 30, 2005; Yahoo stock is down 27% since December 30, 2005. However, Google stock has only gained over 4% this year (since December 29, 2006); on the other hand, Yahoo has gained over 11% this year. At one stage, Yahoo stock had gained over 25% in 2007; however, the latest quarterly results from Yahoo were received less favorably by the investors, and resulted in the drop. Google also had an early rally in the year, and was in the negative territory for a couple of weeks. Google's latest quarterly results eased the investor concerns about Google's torrid growth, and Google shares have gained ground since. Google stock has not appreciated in the same realm as the revenue growth. For a company whose revenue and net income has grown 63% and 69% respectively in one year, the stock performance gain has been only 16%. This has a lot to do with built-in expectation, and Google's already lofty valuation. Yahoo's revenue has only grown 7% in one year; and net income has dropped. Investors have rewarded Yahoo accordingly.

Bottomline

Google is firing on all cylinders, and has the making of a juggernaut. It appears that Google can only fall if Google makes huge missteps and places big bets on the wrong horse. Google has placed sizable bets with YouTube acquisition in 2006, and DoubleClick in 2007. YouTube acquisition led to some bad press owing to copyrights and a lawsuit by Viacom. Ultimately, Google will prevail, and YouTube in the meantime has seen nothing but huge growth in viewers each month. However, it has not come without some costs. DoubleClick will not have the same issues as YouTube; although it was valued astronomically high, hence the margin for error is small. In as much as Google can create timely innovations and execute well, it is poised to expand the market leadership further, and grow the revenue higher and faster. Yahoo has much catching up to do - both on topline and bottomline innovations; if Yahoo does not catch Google in the stride in 2007, it is possible that Yahoo could be relinquished even further in 2008. A time could come in 2008 and beyond wherein Google could outright grab Yahoo's market and begin winning away Yahoo's loyal base. The Disruptive Innovation Gap was created by Google, and now Google is running forward. How does Yahoo stop Google from doing this? It is a daunting task, and will take all of Yahoo’s Panama, Mobile and Content, and then some. Fundamentally though, Yahoo has to recreate that buzz and energy that used to be Yahoo, and get users to go to Yahoo in hordes as they used to go - before Google came knocking.

Can Yahoo! catch Google?

Before Google became Google, Yahoo! owned the search business. However, since Google search came onto its own, Yahoo! search was forgotten and relegated to the number two position. No one even considered the possibility that someday Yahoo! search can generate the type of revenue that Google generates, and possibly take on Google on the core search business that it owns a majority market share by a long shot. However, Yahoo! is coming back with Project Panama. It has a long road ahead, and significant catching up to do. And the question that was once forgotten is now being asked: Can Yahoo! catch Google? Mac Greer at Motley Fool interviewed Pulitzer prize-winning reporter David Vise, a senior commentator with breakingviews.com and the author of The Google Story on the question of the year: Can Yahoo! catch Google?

Yahoo! is one of the top 20 Innovators comprising the The Innovation Index, and is leading the top 20 Innovators in stock performance gain in 2007.

Here is Mac Greer's analysis on whether Yahoo! can catch Google, and his interview with David Vise:

--------Mac Greer analysis and interview-------->

According to preliminary reports, Yahoo Inc. (Nasdaq: YHOO) is recording some early success with its revamped search business, Project Panama. Online measurement company comScore Networks reports that since Yahoo! launched its new search business on Feb. 5, 2007, its click-through rate increased by 5% after its first week (ending Feb. 11) and another 9% after its second week (ending Feb. 18). But can a new and improved Yahoo! catch a tried-and-true Google (Nasdaq: GOOG)? I recently talked Yahoo! and other search-related business with Pulitzer prize-winning reporter David Vise, a senior commentator with breakingviews.com and the author of The Google Story.

Yahoo vs. Google

Mac Greer: David, Yahoo! recently launched what whey call their Project Panama, a new ad-ranking algorithm aimed at improving Yahoo's paid search. Do you think Yahoo! can compete with Google in paid search, or has the horse left the barn?

David Vise: I think that Yahoo! is a No. 2, but I think Google is a runaway No. 1. Google is synonymous with search. Look up "Google" in the dictionary, and it is the noun that has become a verb, "to Google." Yahoo! does have a space in search that is enviable to many people, but in reality, when you look at the numbers in terms of search, Yahoo! has less than 25% of the share. So Google is more than double its closest competitor, and that gap is growing.

Yahoo! has another problem with Project Panama that it is seeking to address. That is, Google is far better at converting searches and clicks into dollars than Yahoo! And Yahoo!'s ability to convert clicks and searches on Yahoo! into bottom-line profits has been very poor, and the company CEO, Terry Semel, has admitted as much. So it will be interesting to see how much Yahoo! can close the gap with Project Panama, and to the extent that it fails to do so, Google's lead will only widen. Remember, Google profits about 50% from searches done on Google.com, but it is the tremendous network that Google has created of literally hundreds of thousands of websites around the world that accept its ads and that it shares revenue with generously that give it a tremendous amount of market clout that goes well beyond its owned and operated sites.

MG: And David, I was stunned to see this stat from Piper Jaffray: Google earns two to three times as much on every user search than Yahoo!?

DV: That's right. It is a stunning figure, and you can bet that while Yahoo! is very publicly rolling out Project Panama, Google is very quietly also doing things to ramp up and improve its monetization of search. That kind of an edge between a No. 1 and a No. 2 in an industry increases the gap so widely that one could envision a time when you get to the point where Google essentially has little or no direct competition and where it really is in a monopoly position, as far as not only the information people are looking for, but also in terms of dominating Internet advertising.

MG: And if Project Panama doesn't take off, can we assume that Yahoo! CEO Terry Semel may not be Yahoo! CEO Terry Semel?

DV: Yes, I would say Terry Semel's future as the CEO of Yahoo! is tied directly to the success of Panama. If Panama succeeds, Semel is the CEO. If Panama goes down, Semel goes with it.

<--------Mac Greer Analysis and Interview--------

NY Times ran a story on the launch of Project Panama on Feb. 5. In this story, "Terry Semel acknowledges that Yahoo was late in starting the project (Panama). He said that happened partly because Yahoo's search advertising system, which the company acquired through its takeover of Overture Services for $1.6 billion in 2003, was performing well, and it took time for executives to realize just how much better Google's system was." ''Panama is a foundation for us to start sewing together all our advertising assets,'' said Tim Cadogan, vice president of Yahoo Search Marketing. Cadogan is also a realist. He believes the initial version of Panama will not get Yahoo! ahead, rather make Yahoo! compete more effectively versus Google.

Yahoo!, perhaps coincidentally after the launch of Project Panama, also began seeing more clicks directed at sponsored search ads, which generate more revenue than algorithmically generated ones. Sponsored clicks represented 10.6% and 11.1% of total click volume in the weeks ending February 11 and February 18, respectively, up from 10.1% during the week of February 4, according to comScore. Perhaps Project Panama is positively impacting the overall Yahoo! advertising business.

In an unrelated story today, Yahoo Inc. (YHOO) Chief Financial Officer Susan Decker was appointed to the board of the venerable Berkshire Hathaway Inc. board. Berkshire Chairman Warren Buffett indicated that the board was looking for someone who was "owner-oriented, business-savvy, interested and truly independent."

Bottomline:

Yahoo!, beginning in late 2005 and 2006, has assembled an experienced team of managers, research fellows and economists to launch bold new initiatives, overhaul the search business beginning with Project Panama, and essentially take on Google in a twelve round boxing match. The first round was won by Yahoo!, the second and third round won decisively by Google; however, Yahoo! has shown that it has the staying power, and wants to now begin the next nine rounds of this long duel. This fight can easily take the next five or ten years. However, Yahoo! now wants to play this game on its own turf, and not get dictated by Google's rules. Case in point: Yahoo! Answers that won out against Google Answers. Yahoo! is also executing well on the mobile front with better, integrated solutions and key partnerships. Yahoo! perhaps has the senior management now that will methodically create the long term plan of attack versus Google. Then again, Google would make you believe that in the world of search, video, and Web 2.0, it is not the seniority that matters: rather unbridled passion and entrepreneurship. Managing and innovating through chaos is indeed the name of the game at Google.

If one takes a look at the financials, the discussion on whether Yahoo! can catch up with Google appears moot. In the quarter ending 12/31/2006, Google reported revenue of $3.2 billion; Yahoo! revenue in the same quarter was $1.7 billion. In the previous quarter ending 09/30/2006, Google revenue was $2.7 billion; Yahoo! revenue was $1.6 billion. Google quarter over quarter revenue growth is 19%. Yahoo! quarter over quarter revenue growth is 8%. A key measure is the widening quarterly revenue gap between Google and Yahoo!. The revenue gap for the 12/31/2006 quarter between Google and Yahoo! was $1.5 billion; for the previous quarter ending 09/30/2006, the revenue gap was $1.1 billion. The revenue gap quarter over quarter growth between Google and Yahoo! is a staggering 36%. If Yahoo! has to catch Google, not only Yahoo! has to increase its own quarterly revenue growth in the 25% to 45% range, but also grab market share and revenue from Google, and finally stall Google's revenue growth. Is this a lofty goal? Of course. Impossible? Nothing is. Unlikely? Only time will tell. Because it will take many years if Yahoo! is indeed going to catch up with Google.

Can Yahoo! catch Google? In ten years, would the headlines read: How Yahoo! toppled Google?

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