Yahoo! JAPAN Corporation (PINK:YAHOY) reported its Q3 FY 2012 results on January 29. The company posted a solid 16% increase in revenue year-over-year as total revenues for the quarter grew to JPY 89 billion. 
In our pre-earnings announcement, we stated that we will closely watch the progress the firm has made in its mobile advertising division. During the quarter, the firm posted a healthy increase in mobile ad revenues, which grew to 13% of total ad revenues. We think that this will be a big growth driver in the future and are encouraged by the company’s progress in the division. Smartphone penetration in Japan is expected to increase going forward and Yahoo! JAPAN is in a good position to capitalize on this growth.
Mobile Is Key For Yahoo! JAPAN’s Valuation
According to our estimates, mobile advertising contributes approximately 20% to Yahoo! JAPAN’s total value, even though it made up only around 6% of total revenues in 2012. We think that revenues from this division will make up 15% of total revenues by 2015 and 23% by 2019, primarily due to growth in mobile advertising.
For 2012, we estimate that Yahoo! JAPAN’s page views per unique visitor slightly fell from 194 per month to 187 per month in 2012. Despite this fall, mobile ad revenues grew 20% during the year primarily due to a large increase in mobile ad revenue per page view, which grew from JPY 132 in 2011 to JPY 180 in 2012. Overall, we are encouraged by growth in this metric as it shows Yahoo! JAPAN’s pricing power in the Japanese mobile advertising industry. We think the company will be able to leverage its dominant position in the Japanese Internet landscape to drive mobile revenue growth in the coming years.
Margin Health Encouraging
Yahoo! JAPAN’s full year gross margins remained at a strong 90%. We estimate this metric will slightly decline going forward because there will be many challengers trying to dethrone it as the top Internet company in Japan. Overall, the company’s gross margins are the key as a decrease in gross margins to approximately 87% would result in 10% downside to our price estimate.
Due to the importance of this metric to its overall valuation, we will be closely watching margin trends over the coming year. If Yahoo! JAPAN is able to maintain its margins, it will mean that the management has been effective at keeping costs under check in the competitive tech landscape.
Revising Price Estimate to $12.82 On Yen Weakness
We have lowered our price estimate for Yahoo! JAPAN by around 10% from $14.08 to $12.82 on a depreciating Yen versus the US dollar. We value Yahoo Japan’s dollar denominated stock trading in the U.S., and a decline in the Yen has made Yahoo! JAPAN’s earnings less valuable in dollar terms. We will continue to follow the currency movements as the Bank of Japan’s quantitative easing proposal will increase the supply of Japanese Yen and create downward pressure on the currency. Notes: