Carol Bartz Yahoo CEO Carol Bartz is living up to expectations -- but that ain't so good.

When she was hired a little over 18 months ago, Yahoo's (YHOO) board was looking for someone to deliver a decisive leadership style, operational excellence, shareholder value, and the ability to drive growth. To date, she's delivered on two of the four -- decisive leadership and operational excellence, as evidenced by Yahoo's dramatic growth in operating profits and its sale of non-core businesses.

But shareholder value and revenue growth have remained elusive. Bartz, the former CEO and executive chairwoman of Autodesk (ADSK) was hired for her reputation for operational excellence and technology acumen, even though she lacked advertising experience, where Yahoo derives the bulk of its revenues. People familiar with the board's thinking, but not authorized to speak on behalf of the company, say board members addressed that question prior to hiring Bartz, but they felt was it was more important to have a technologist at the helm of Yahoo to regain an edge against Google.

Steady Underperformance

Yahoo's revenues, excluding traffic acquisition costs, which Wall Street discounts, have steadily fallen over six consecutive quarters, with the exception of the fourth quarter. Yahoo's stock, meanwhile, has underperformed the Nasdaq and arch-rival Google for most of Bartz's tenure.

Yahoo's Quarterly Revenue Performance Under CEO Carol Bartz
Quarter Revenues, excluding TAC* Analyst Estimates
First Quarter, 2009 $1.156 Billion $1.204 Billion (missed)
Second Quarter, 2009 $1.136 Billion $1.142 Billion (missed)
Third Quarter, 2009 $1.131 Billion $1.123 Billion (beat)
Fourth Quarter, 2009 $1.258 Billion $1.231 Billion (beat)
First Quarter, 2010 $1.130 Billion $1.168 Billion (missed)
Second Quarter, 2010 $1.128 Billion $1.157 Billion (missed)

*Traffic Acquisition Costs
Source: Thomas Reuters

All of this raises the question of whether her tenure at Yahoo may be shorter than her four-year contract.

Bartz was the board's No. 1 CEO choice from the beginning, even though she initially expressed no interest in joining the company, say people familiar with the board's thinking. One person noted that Bartz likely has at least another two quarters to turn things around, but it would be surprising if she's there in a year if nothing changes.

In February, Yahoo's board added a revenue growth criteria to her bonus target, according to Yahoo's filing with the Securities and Exchange Commission.
For 2010, if the operating income target is attained, the amount (if any) by which the Company's revenue for 2010 exceeds a revenue performance target established by the Compensation Committee will also be a factor in determining 2010 bonus amounts under the EIP [Executive Incentive Plan] and the vesting of the financial performance-based restricted stock units granted in 2010. Adding the revenue goal creates an additional incentive, assuming the operating income measure is achieved, to drive growth through revenue generation.
Last year, Yahoo's board awarded Bartz 75% of her target bonus of $2 million, which did not have a revenue growth component.

Not Keeping Up With the Competition


Yahoo's performance is in stark contrast to competitors like Google (GOOG), which posted a whopping 24% increase in sales to $6.82 billion in the quarter and was still ahead when stripping out its partner sites, coming in at $5.94 billion with 7% year-over-year growth. Privately held Facebook, meanwhile, boasts that some of its advertisers have increased their spend by 20-fold in the past two years, accomplishing that feat during the bulk of Bartz's tenure at Yahoo.

"In one-and-half years, she's made a lot of changes that have been good, some bad," said another person familiar with the board's thinking, adding "She needs to start showing results, but there's no timetable."

In its last CEO go-round, Yahoo's top exec left by mutual agreement after 18 months. Embattled CEO and founder Jerry Yang saw his reputation pummeled by investors and Wall Street after Yahoo turned its nose up at a $31 a share buyout offer from Microsoft, and then a $33 a share bid in 2008, before Gates and Co. stepped back from the table.

Yang's appointment followed a six-year CEO stint by Hollywood studio king Terry Semel, whom investors nearly ran out of town after a rambunctious shareholder meeting. Semel was ousted for failing to drive revenue growth, losing a massive market position to then-young upstart Google, and lacking the vision to make smart acquisitions, like YouTube. He resigned within a week of the contentious shareholders' meeting. As a result of Semel's performance, Yahoo's board was afraid to go after another "media" executive after Yang stepped down, say people familiar with the board's thinking -- hence, the search for a technologist.

"She's a Disaster"

At least one major Yahoo investor isn't happy with Bartz and doesn't see her as an improvement over Semel.

"I think she's a disaster, but they probably don't have another internal candidate they can slip," the investor said. "She has no vision, has executed poorly on growing the company and pissed away most of the Microsoft savings [from its search partnership]. I give the board even lower grades."

Bartz struck a search partnership agreement with Microsoft (MSFT) in February. Under the deal, Microsoft's technology runs Yahoo's searches in the background while Yahoo continues to sell display advertising on its collection of Web sites. Yahoo loses its paid search advertising revenues under the deal, but it is freed up from the cost of maintaining and further developing its own search engine.

Yahoo and Bartz declined to comment for this story.

Ken Smith, co-manager of the Munder Growth Opportunities Fund, appreciates Bartz's cost-cutting ways and is willing to forgive a lack of revenue growth for now.

"Operationally, I'm pretty happy with where they are. I wish the stock was higher, but, realistically, it takes time," Smith said. "She has a new management team to assemble and is deciding which businesses to be in," said Smith, who estimates Bartz may need another six months to make that happen. "She got the company back to its roots. It's a media company and she is gearing all of it toward that."



Nonetheless, Munder Growth Opportunities shed roughly 1.5% of its Yahoo holdings since the start of this year, bringing its ownership to roughly 1.2 million shares as of June 30, according to data available through Morningstar. Yahoo represented a 4.7% slice of the fund as of June 30.

The Silver Lining

One of the things that has bought Bartz more time to enact a turnaround has been an improvements in operating margins, which has taken place within a weak economic environment that has affected a wide swath of companies. Other factors on the plus side are Yahoo's $3 billion dollar stock buyback program, decisive action jettisoning businesses that aren't core to Yahoo's efforts to evolve into a major media player, and, lastly, a huge turnover in Yahoo's board, where only six of the 11 directors who were present at the time she was hired still hold seats.

The departure of the five directors gave Bartz an opportunity to introduce potential allies to Yahoo's board, in the hope they would be seated until the next shareholders meeting, where they could officially be elected to serve.

"A smart CEO would bring people on the board, so if things got tough they'd have board members who were like-minded or, at the very least, have a high opinion of them,"" said Jon Holman, who heads up The Holman Group executive recruiting firm.

One of the vacancies filled included someone Bartz worked with in the past: Sue James, formerly a lead partner at Ernst & Young, performed audit work at Autodesk while Bartz was there. People familiar with the board said Bartz did not play a role in the large turnover that occurred, nor was she attempting to stack the board in her favor.

Holman, who is also a director on a public company, estimates that Bartz may have an additional six months to year-and-half to turn things around.

"In normal times, if a business hasn't taken off in a year to 18 months, that's a danger signal for a CEO," Holman said. "But we live in a strange time right now. The economy is still bad and I think most boards would be reluctant to say their CEO has failed if the business hasn't taken off. Nobody has done anything heroic in the last 18 months."

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