Yahoo! Japan Earnings: Revenue Growth Slows Due To ‘No Listing Fee’ Strategy

Yahoo! Japan Corporation (OTC:YAHOY) reported its Q1 FY 2015 results on July 31. (Fiscal year end with March.) The company posted 2.8% year-over-year growth in revenues to ¥99.9 billion ($970 million). However, the operating income declined by 0.5% to ¥48.7 billion ($470 million) due to the implementation of new strategies for its shopping division. While the company reported improvement in its advertising revenues, its shopping, auctions and listing services reported significant decline in revenues as the “no listing fee” strategy took hold. The negative turn will be transient, however, because in the long run as transaction value across Yahoo! Japan rises, so will the revenue.

During the quarter, advertising revenue grew by 8.8% year over year to ¥57.8 billion ($562 million). However, listing, shopping and auction service revenues declined by 15% year over year ¥16.04 billion ($160 million). Nevertheless, the company reported higher transaction value for its shopping division, as the change in listing strategy (noted above) bore fruit. The highlights of the results are as follows.

See our complete analysis of Yahoo! JAPAN here

Mobile Services Take Center Stage

In our pre-earnings note, we stated that we will closely watch the progress the company has made in its mobile advertising division. The increase in mobile ads revenue was instrumental in bolstering search ads revenues. We believe that growth in smartphone penetration will be a big growth driver for the company in the future as it affects all of Yahoo! Japan’s divisions. According to our estimates, mobile advertising contributes nearly 20% to Yahoo! Japan’s total value. We believe that revenues from this division will account for almost 25% by 2020, as ad budgets increasingly shift to mobile users. During the quarter, the firm posted a healthy increase in mobile ad revenues, which grew to ¥18.1 billion, and now accounts for 31.7% of total ad revenues. ^[1]

Furthermore, the company reported 57.8% year-over-year growth in smartphone daily unique browsers (DUB) to 36 million and over 190 million downloads for its smartphone app during the quarter. As a result, the number of monthly smartphone pageviews grew by 70% year over year to 23.78 billion. As the company is increasing content across its properties, we believe that the company will be able to leverage its dominant position in the Japanese Internet landscape to drive mobile revenue growth in the coming future.

Transaction Value Across E-commerce Properties Grows as Listings Rise

While the search and listings ads division contributes 17% of Yahoo! Japan’s total value, the online shopping and auction division contributes 15%, according to our estimates. The company removed listing and tenant fees for its websites in Q2 FY14, to stimulate growth and increase the number of listed sellers. The number of listed sellers is important for Yahoo! Japan’s shopping division because as listings grow, more users are likely to find and buy products on its site, which will increase the transaction value across Yahoo! Japan’s shopping websites.

As a result of this new strategy, the company added over 134,000 store ids for its shopping portal in the last nine months. With this increase in store ids, the number of products listed across its shopping website increased by 60% year over year to nearly 120 million. The transactions value, across shopping, auction and listing divisions, grew by 12.1% year-over-year to ¥816.5 billion. However, the company reported 15.2% year-over-year decline in revenue as it had to forgo listing fees and cut down its take rate for transaction across its shopping sites. We expect that as this strategy gains traction, Yahoo! Japan’s revenues will increase due to higher transaction value across its sites. Currently, we estimate that by 2020, the transaction value from shopping and auction divisions will grow to ¥400 billion and ¥780 billion respectively.

We are in the process of updating our Yahoo! Japan model. At present, we have a $14.86 price estimate for Yahoo! Japan, which is around 50% above the current market price.

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1. Yahoo! Japan Presentation [↩]