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Something to Yahoo! About: an internet winner.

Susan Decker is the antithesis of complacent; she takes nothing for granted. CFO and Executive Vice President, Finance and Administration of the number one Internet services company, Yahoo! Inc., Decker quotes a friend who was training for the Olympics: "To be number one, you have to train like you are number two." She never forgets that.


Yahoo is a true survivor, a rarity from the early-Internet era. Thousands of companies that sprouted during the mid-to-late 1990s dot-com heyday are but a memory--often a bad one in many portfolios--having folded or radically changed their original concept to survive. Yahoo has not only maintained its original concept: it's expanded, stretched and grown--vertically, horizontally, organically and just about every which-way.

Yahoo, a whimsical acronym for "Yet Another Hierarchical Officious Oracle," is cited by many as the company that defined the way people use the Web. It offers an array of services for Web users around the globe, both consumers and businesses, as it continually enhances the breadth and depth of its franchise. The Sunnyvale, Calif.-based company's services now reach over 263 million users each month in 13 languages in 25 countries.

Founded as a hobby in 1994 by then-Stanford Ph.D. students David Filo and Jerry Yang, it was incorporated in 1995 and went public shortly thereafter--on April 12, 1996, opening at $13 per share, and closing at $33 per share. An investor buying 200 shares ($2,600) on that first day now owns 2,400 shares (it's split four times) valued at approximately $116,328 ($48.47 per share) by March 31, 2004.

Not that it's been all gravy. Even an innovative company like Yahoo has much to grapple with--from the beginning of the rush to the Web, when new Internet companies flush with money raised from Wall Street and eager to get their names out spent big on advertising; to the dot-com bubble, when the easy Wall Street money dried up, as did much of its advertising revenue; to the uncertain global economic environment; and its new strategy to charge consumers for enhanced services.

A member of FEI's Silicon Valley Chapter, and CFO since 2000, Decker spoke with Financial Executive's Managing Editor Ellen M. Heffes about the company's growth and how it's relying on innovation to expand its core strategies and perpetuate its success.

Why do you believe Yahoo has been so successful? What does it do right?

Decker: We start with some great assets. Yahoo has a global user base, and we now have a globally recognized brand. We have made it a priority over the last few years to both build and buy some of the best products and services on the Web to serve and continually build that base.

Particular areas of focus on the product side have been: search, mail, sports, finance, you name it; we've been upgrading and building the product side. That's important because it is self-reinforcing; it keeps people coming back to our network, and staying longer.

From that kind of chemistry, we have a growing number of consumers that find so much value from what we offer, so not only are they using the free products, but they are increasingly paying for various deeper usage of our products and services. Keeping people longer and [providing] deeper access has the benefit of being very attractive to our advertiser base--big auto, packaged goods and entertainment companies--that are attracted by the breadth of the distribution network.

Also, others, like e-commerce companies and small and medium-sized businesses, see low-cost ways to acquire new customers through our model.

Since Yahoo started in 1994, top leadership has changed several times. When current Chairman, Terry Semel, the former Co-CEO of Warner Bros. was hired, it was said to be an indicator of the company's direction. What do you believe he's brought?

Decker: Terry has brought a number of things to the table. He has drawn on his past experience, which was very relevant to Yahoo, and where it was in its development [when he joined]. The most important things that he has brought include his leadership and managerial experience; he's built great consumer franchises before, so he brought that management maturity to a very young company with a lot of smart, passionate people, and he's really helped us focus on the most productive opportunities.

Besides just good business judgment, he has excellent negotiating skills and a really keen sense for consumer marketing--which was an area Yahoo wasn't that developed in before his arrival. We were very product-technology driven, and we've built that out--we hired a chief marketing officer (CMO); and we are increasingly focusing on the consumer marketing side, where he [Terry] has a lot of experience.

Of Yahoo's consumer services, which are the top revenue generators?

Decker: The top four revenue generators are: 1) content bundled with access; 2) mail services; 3) personals; and 4) small business services. I'll expand on each.

Content bundled with access: We have partnerships with a number of major broadband access providers. The first and largest is SBC [Communications Inc.]; it provides DSL. Recently we launched services with British Telecommunications [in the United Kingdom], and we have announced our intention to launch a service with Rogers Cable in Canada. Yahoo! Japan has a thriving broadband service, as well. So, we are in each of the major geographic regions of the world.

We have a broadband package of Yahoo and a collection of a few free premium services that subscribers to, say, SBCYahoo DSL would get if they signed up for the service. That is the biggest [revenue generator from consumers].

The next is a collection of mail services. We give a certain amount of free storage for email, pictures, etc., and when users hit certain thresholds, we charge for the incremental use. Then, personals is a very strong and thriving service, where people pay to connect and meet people to be friends and date. Also, we have a number of small business services like hosting domains and storage platforms.

What is your thinking on people who use the site often, but refuse to pay for services? Do you plan to "convert them" to paid users?

Decker: We like them all. We see our business as a funnel. At the top of the funnel are the free users. That is the biggest base, and that's attractive to advertisers, so it's important that we have a big breadth of user-base, and we will continue to develop world-class products and services to attract them. Further down the funnel are our active registered users (people who sign up to use particular services with a username and password), which is almost half of the 263 million users on Yahoo. They come to the site many times a month, and personally give us their information and their interests.

For those who are really passionate about some of our services, and want to go deeper in than the free version, we offer paid versions. We ended last year with close to 5 million paid relationships. Our CEO has put the challenge out publicly that we think we can get to 10 million, and our public guidance this year is for a range of 7 to 7.5 million or so. So, we are well on our way to a very thriving paid-services base. We have great plans there, but not at the exclusion of our free users, which is where we get a lot of the breadth that attracts the advertisers.

Where does Yahoo's highest revenues come from--is it advertising?

Decker: We report our revenue according to U.S. GAAP, and what I guide people on is our net revenue number that doesn't include the affiliate payments on Overture Services Inc.'s [acquired last year] business. On a net basis, last year [2003] we did $1.4 billion; $1 billion was marketing, $300 million was fees and another $100 million, listings. So, yes, advertising is the biggest revenue generator.

Let's look at Yahoo's overall strategy. In many cases, you started with a partnership and then acquired the company. Talk about the business rationale for some of these.

Decker: On the acquisition front, the two big ones in the last year were both in search, as both the science and the art of search have changed dramatically over the last few years. The "science" is the pure number of documents that are crawled by search algorithms; a lot more of the Web is being crawled by search engines today. The "art" is the relevance of the results served back to the user. A few years ago, you would probably type in a one-word query; today, most people type two- or three-word queries. They can get more precise, as the basic service of search has gotten better.

Thus, we decided that to innovate more directly and improve the consumer experience, we needed to own assets rather than license the service, which is what we had done with Google. It was important for our consumer franchise to be first with not only the innovation; but to be able to link--we have a lot of other content verticals out there, [and] we needed to own the underlying technology to do that. That was the motivation behind swapping up from a partnership to an owned-and-operated-asset when we bought Inktomi Corp., the huge consumer franchise with great technology and engineering.

The other side of the equation is how you ring the cash register of search, the monetization piece. Here, we also previously had a partnership [with] Overture. But as we became a larger part of Overture, it made sense for us to capture all of the economic stream rather than sharing it. It also made sense to have control over the search platform, the advertisers and the sales opportunities.

Search, originally just a service, has become a very large business. By "just a service," I mean it's with the idea that if we produce great services, ultimately they'll become great businesses. For example, both search and mail were just services a few years ago, without business models. Today, they're two of our large profit centers.

To the broader question on acquisitions, from the beginning, we've completed close to 30 acquisitions, with about five important ones over the last few years: the two just discussed, and 3721, and acquisition in China. Also, we bought Hot Jobs a couple of years ago and a company called LAUNCH, a music business. They are the biggest [and] most recent ones--all with the same strategy, which is to identify areas where we can truly add value by applying our consumer base to greater areas of vertical strength.

On the partnership side, there are literally hundreds of them. Our business development and legal staff handle those contracts. The most significant ones are the access deals in recent years, with SBC, BT and Rogers.

We look at every option along the way--whether building, buying or partnering, and we pursue those, depending on which situation would likely create the most value at the time. Early on, we partnered with companies for careers, search and personals. We later decided to either build or buy principal positions. Along the evolution of Yahoo, different things make sense--we're flexible, and we pursue whichever arrow in our quiver makes the most sense.

Global growth has been key to Yahoo from the get-go. As CFO, what is it like to gather the financials?

Decker: It creates growth opportunities for us, and, at the same time, we face all the usual challenges of a growth company whose infrastructure and business processes are kind of catching up with that growth. The good news from my standpoint is that our finance operations all roll up through the finance organization through my controller, rather than to our operating heads, so we have very strong operating control.

In addition, we are in the process of rolling out more sophisticated and better integrated systems, both on the accounting and the reporting sides; ultimately, we are moving to a shared services center in Ireland. One of the great things about acquiring Overture is that it had a lot of the infrastructure in place that Yahoo will combine with.

Once you put in new systems, you have to change business processes around that, and we are working on that now. The end result should be better control, greater efficiency and, ultimately, many of our country controller positions could migrate to higher value-added, [to] more business forecasting and partnering with their local managing directors (MDs).

There is a lot going on beneath the surface. We report nine or 10 days after the quarter closes, which is the first company out in our sector. We are able to get it done through hard work, commitment and good process, but there is still a lot of work ahead to make sure that we scale efficiently.

Will convergence of global accounting standards make your job easier?

Decker: No, because we report in U.S. GAAP. But I think it is good for the world and the capital markets to have convergence of various accounting principles. In terms of its effect on us, to the extent that the U.S. were to adopt from the international standards, it would change the accounting substantially. I think it will go both ways, but probably more convergence to the U.S. standards than the opposite. For the last four years, I was on FASC (Financial Accounting Standards Council), the council that advises the Financial Accounting Standards Board (FASB).

Prior to Yahoo, as a Wall Street analyst, you had quite a different work environment. Was coming to Yahoo a culture shock?

Decker: I'll start with why I came here. I had been on Wall Street for 14 years--with Donaldson, Lufkin & Jenrette (DLJ) since I got out of business school--as a media analyst for 12 years, and a director of global research for two years. I had covered 30, 40, 50 companies, knew lots of management teams; I worked with, watched, and, in some cases, contributed to their strategy formation. I started itching to go from sitting on the sidelines to getting on the field and playing.

Thus, I joined Yahoo, to have that front row seat in helping a company define and evolve its strategy and ultimately profit from the huge amount of growth opportunity. So much was happening on the Internet, and still is. The company was far enough along in its development--given its massive and loyal user base--that I felt that it had all the ingredients necessary to develop a sustainable business model. So, [while] not a complete start-up, it was well enough along that it looked like it would be one of the major surviving companies.

What was challenging wasn't what you would think. The business environment got very tough, just after I joined in 2000, and we went through the things that a company has to do, including downsizing. What was more challenging and different from my past role is, when a company goes through that kind of transition, it needs transitional people.

Early on, Yahoo's team (top-to-bottom) was comprised of people that were attracted to an early-stage growth company. When a company gets large enough, it has to add process, and [it] needs to attract a different type of person who wants to build on something already started.

So, we've had a real transition over the last three years. The early leaders and employees retired--they did well financially, or decided to do more entrepreneurial things--and we had to attract a cadre of experienced leaders and managers to run a lot of the verticals. That's a continuing process.

That has been exciting, but pretty different from Wall Street. DLJ was a growth company within Wall Street--a little more mature than Yahoo. Yahoo has a very flat work structure; it's a meritocracy, collegial [and] fun, but there's a lot of professionalism within the culture. So, it has been a remarkably easy transition, with a little bit of turbulence. When you're bringing in new people and old people are going out, it's two steps forward and one step back. We have a lot of traction now, and a great team.

Yahoo is known for its innovation. Talk about some of the competitive and growth challenges you are now dealing with, going forward.

Decker: Innovation is critical to everything we do, and acquiring principal positions is what is really behind the ability to directly innovate on a product. One of the self-reinforcing things about Yahoo is with so many people coming to our site, and because of our search franchise, we have a pulse on what consumers are looking for, [and] what the top queries are. We can see emerging interest areas very early, earlier than others can. That allows us to effectively focus our development into new and innovative products and services.

There is no shortage of opportunities, and our challenge is prioritizing those opportunities and the growth, and building process around them. In some ways we touch every opportunity for consumers on the Web. Whether [it's] search, communications, travel, games or auctions, we have our fingers in every major area of consumer interest. Also, there are new categories that can become popular on the Web that we look at, [and] there are new devices and places where people might want to review their Web information or interact with consumers--from wireless or from their living room.

So, the real challenge is making sure we pick the most important areas, spec the business requirements right, attract the right people, build the right process and architect the right systems to support the back end. If we do that well, I think we're very attractively positioned from a competitive standpoint, because of our massive distribution base.

We're a little different from some of our competitors in that we've chosen to be principals in some of the vertical areas, and we have been able to integrate and add personalization to those vertical areas. That innovation attracts more consumers, and it's kind of a virtuous circle. Our user growth has been about the best out there, and that ultimately transforms into financial value.

We do face a lot of varied, capable competitors--and we're appropriately paranoid all the time. But we feel confident that we have a great shot and great positioning at gaining more share and creating more value.

Who are some of those "capable" competitors you refer to?

Decker: Clearly, Microsoft and the AOLs and Googles of the world are all big broad global competitors. We have hundreds of competitors in every country that hold locally strong positions. We have vertical competitors--in personals, we compete with We have a host of competitors out there, [and] competition makes everybody better, really.

When we think about our opportunities, they are so linked to the opportunities on the Web itself, and the Web gaining share from traditional advertising and consumers finding and buying more things. Certainly there is an element of how you slice up the pie, but we are still pretty early on in the opportunities of the Web. The market growth itself is fantastic!


Select Key Milestones

* Jan 1994 Created as "Jerry and David's Guide to the World Wide Web," by Jerry Yang and David Filo

* Mar 1995 Yahoo is incorporated

* Apr 1996 Yahoo goes public; trades on Nasdaq as YHOO

* May 1996 First "Do you Yahoo?" TV commercial airs

* Jul 1997 Announces first common stock split (3-for-2)

* Nov 1997 U.S. audience surpasses 25 million users

* Jul 1998 Announces second common stock split (2-for-1)

* Jan 1999 Tim Koogle made chairman and CEO and Jeff Mallett made president and COO

* Jan 1999 Announces third common stock split (2-for-1)

* Dec 1999 Added to the S & P 500

* Jan 2000 Announces fourth common stock split (2-for-1)

* Apr 2001 Terry Semel appointed chairman and CEO

* Apr 2003 Yahoo introduces New Yahoo search

* March 2004 Yahoo agrees to buy Kelkoo SA, Paris, a European comparison-shopping Web service
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Title Annotation:Susan Decker
Author:Heffes, Ellen M.
Publication:Financial Executive
Article Type:Cover Story
Geographic Code:1USA
Date:May 1, 2004
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