Yahoo! (NASDAQ:YHOO) reported fourth quarter and full year earnings Monday, January 28. The company posted net revenues (excluding traffic acquisition costs) of $1.2 billion, an increase of 4% year-over-year and a 10% increase in non-GAAP (Generally Accepted Accounting Principles) operating income, which was $283 million compared to $259 million in 2011. Despite the encouraging top line growth, Yahoo!’s display ad revenues fell 5% year-over-year in the fourth quarter, and 2% year-over-year for the whole year. 
Full-year Revenues Grow For First Time Since 2008
While display ad revenues ex-traffic acquisition costs (TAC) fell 2% for the full year, the company’s overall revenues ex-TAC increased by 2%. The higher revenues were driven by a 9% increase in search revenues, which increased to $1.6 billion from $1.4 billion in 2012. Search revenues grew because of an 11% increase in paid clicks during the fourth quarter, which occurred despite news that Yahoo!’s search traffic declined during the year. This means that Yahoo! is likely improving the advertising quality on its search engine as it is able to translate lower traffic into higher clicks. If it is able to maintain this trend, and also grow its search user base, revenues from the search division are likely to be a growth driver going forward.
Focus Again On Employees
Yahoo! CEO, Marissa Mayer, has again stressed on the importance of the firm’s employees. Working on this company ideology, she introduced few changes to the firm’s culture during the third quarter, like giving free food to employees, instituting quarterly performance reviews and internal feedback tools for products. Mayer says this has helped lift employee morale.
Additionally, Mayer streamlined more of Yahoo!’s processes during the quarter, like reducing bureaucracy to implement a more collaborative and bottom-up culture. These changes, however, can have an impact on the firm’s margins going forward. An important part of retaining quality employees in Silicon Valley will be paying high wages, which is likely to increase costs over the long term. Therefore, Yahoo! will have to focus on cutting costs in other parts of its business. Overall, we will have to wait and see how management will cut costs going forward, as margins will be an important factor in Yahoo!’s bottom line growth.
Mobile Platform Hits 200 Million Unique Visitors
It seems that Mayer’s investment in Yahoo!’s mobile platform with the revamp of Yahoo! mail and Flickr have paid dividends, as the firm’s total mobile unique visitors hit approximately 200 million. We have argued that Mayer must invest in Yahoo!’s mobile platforms since this avenue can be a big driver of growth for the company, especially in the emerging markets, and are encouraged by her continued focus on this platform during the earnings call.
The mobile platform is an important point of focus for Yahoo! since it will drive organic user growth in the emerging markets, as new members of the middle class are first accessing the Internet via their mobile phones. Since these individuals aren’t familiar with various Internet platforms, a successful mobile product would get them using Yahoo!, and building user familiarity and loyalty.
Additionally, the mobile product line can also drive page views. A greater number of Internet page views are via mobile phones when compared to traditional personal computers. According to research firm StatCounter, the percentage of total internet page views on mobile phones was 10.1% in May 2012, almost doubling the 5.8% that it had posted for the same period in 2011. The growth was more pronounced in Asia, which saw the proportion grow to 18% in 2012 vs. 8.3% year-over-year, and provides some indication of the growth trend in emerging markets.  Overall, we think that mobile can be key to Yahoo!’s long term health. Not only can it succeed in the emerging markets due to the mobile Internet trend, it can also get a substantial piece of the global mobile advertising pie, which will stand at approximately $26.6 billion in 2016, according to research firm eMarketer. 
We are currently in the process of updating the Yahoo! model. At present we have a $21 price estimate, which is approximately the same as the current market price.Notes: