Financial Comparison Between Google and Yahoo

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Attached, is a fully formatted MS Word file, as well as an Excel spreadsheet containing information on the ratios that were used during the creation of this financial comparison between Google and Yahoo.

Google vs. Yahoo
A Comparative Financial Analysis

Estimate the five operating expenses for each of the past three fiscal years, and evaluate what operating leverage, if any, was applied each year.
The operating leverage is a measure of how revenue growth translates into growth in operating income. It can be a ratio of fixed costs to variable costs that have been incurred to generate revenue. The two costs, fixed and variable are the operating expenses, with the ratio between the two being the determinant factor in how growth in revenue impacts a company's operating margin. If the variable costs are all the operating costs, then the operating margin would be constant as sales increased, with a 10 percent increase in revenue generating a 10 percent increase in operating income. If however, fixed costs are high, as in the case of Google and Yahoo, then a 10 percent increase in revenue will generate quite a bit more than a 10 percent increase in income from operations, essentially increasing (leveraging) the operating margin.
The following tables, representing the yearly results of operations as a percentage of revenues for Google and Yahoo, substantiate that fact.

As it can be seen in the chart on the previous page, Google's overall revenue growth for the past three years has been significantly higher than that of Yahoo, increasing 92 percent from 2004 to 2005, and an equally impressive 73 percent from 2005 to 2006. Yahoo's revenue growth for the same period, while impressive for any industry, lagged behind at 47 percent from 2004 to 2005, and 22 percent from 2005 to 2006.
From 2004 to 2006, Yahoo has been very effective at controlling its costs of revenues, decreasing its percentage from 56 percent during 2004 to 2005, to 28 percent during the company's fiscal year 2005 to 2006. Although Google has also been decreasing its costs of revenues during the past two years, such costs still remain at a high percentage of revenue, currently at 65 percent for the year just ended.
Seeking to increase its share of the internet provider service market, Google virtually doubled its spending on research and development from 2005 to 2006, while Yahoo's pursuit of product innovation has remained steady at 12 to 13 percent of total revenue for the past two years.
While holding the line on its costs for research and development, Yahoo continues to seek new customers through its sales and marketing efforts, spending nearly twice as much as Google from ...