Yahoo Q3 Earnings Preview: Looking For A Clear Strategy

by Trefis Team
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Yahoo! (NASDAQ:YHOO) is set to report its third quarter earnings on Monday, October 22nd. The company had an eventful third quarter which was set off by a change in leadership as it brought on Google (NASDAQ:GOOG) executive Marissa Mayer as its new CEO.

Since Marissa Mayer has just taken over, we think this quarter will be quite uneventful on the financial front. However, since this will be Mayer’s first earnings call as CEO, we will be looking for more clarification on the company’s turnaround strategy. Additionally, we will look for signs about the health of Yahoo’s display ads business and Mayer’s strategies for the use of cash from the partial sale of Yahoo’s stake in Alibaba.

Click here to see our complete analysis of Yahoo!

Display ads are key for Yahoo’s long-term health

According to our estimates, the display ads segment is the biggest of Yahoo’s operating segments and makes up approximately 14% of the company’s value. While this is not a huge portion at present, display ads will be very important for the company’s long-term prospects once Yahoo liquidates its Alibaba stake and returns most of that cash to the investors.

At present, Yahoo’s display business seems to be struggling with increasing competition. Last quarter, the company’s display ad revenues increased only 2% year-over-year to around $534 million. What puts these dismal growth numbers in perspective is that global display ad spending is expected to increase by almost 20% during the year, which shows that Yahoo is doing a poor job of capitalizing on online ad spending growth. [1]

Even if this segment reports dismal numbers again in the third quarter, we would at least like to see Marissa Mayer lay out her plan for growing the display ads segment. We know that the high level strategy will be focused on mobile and social, but we would like more specifics as to what she actually plans to do.

What will Yahoo do with the cash from Alibaba?

During the quarter, Yahoo finalized the sale of half of its assets in Alibaba Group. [2] The company received approximately $4.3 billion in after-tax cash proceeds and decided it will keep around $1 billion of it for future investments.

During the earnings call, one topic of keen interest among analysts will be Mayer’s plans for the Alibaba cash. We will be watching her answers closely in the hope of getting some concrete information about Yahoo’s future investments. For our views on what Yahoo should do with the Alibaba cash, read Cash From Alibaba Sale Should Be Invested In Mobile And Social.

We currently have a $19 price estimate for Yahoo!, which is approximately 20% above the current market price.

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Notes:
  1. Why Google Doesn’t Own the Next Chapter in Web Ads, AllThingD []
  2. Yahoo! Completes First Stage of Alibaba Share Repurchase Agreement Valued at $7.6 Billion, Yahoo! pressroom []
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