Yahoo Earnings: Mixed Results But Progress Being Made

Yahoo! (NASDAQ:YHOO) reported its first quarter earnings on Tuesday, April 16. The company posted net revenues (excluding traffic acquisition cost) of $ 1.07 billion, flat compared to last year. However, its non-GAAP operating income decreased by 3% to $224 million from $231 million in Q1CY12.  Non-GAAP net income was $420 million, up 26% from Q1 2012 driven by growth in equity investments in Alibaba and Yahoo! Japan. ^[1]

Yahoo’s core display ads business continued to suffer and decreased by 10% y-o-y  to $455 million. Its Search ads business, which had grown by 14% in Q4FY12, also fell by 10% y-o-y to $425 million. During the quarter, the CEO Marissa Mayer continued to focus on retaining and hiring new talent.  Additionally, as per our pre-earnings wish list, she has taken prudent measures to address the decline in display ads revenue that will augur well for the company in future.

See our complete analysis of Yahoo! here

Focus on Hiring and Retaining Employees

Yahoo! CEO, Marissa Mayer, has again stressed on the importance of the firm’s employees.  Yahoo has implemented a number of employee focused initiatives across the company that has lead to lower attrition rate and increased applicant number.  Moreover, Yahoo  has been focusing on hiring talent through acquisition (Acqu-Hire). In Q1CY13, Yahoo acquired Alike and Jybe so that Yahoo could accelerate its efforts in mobile development and content personalization.

These changes, however, can have an impact on the firm’s margins going forward. Acquisition cost tend to erode the profitability of the company. Moreover, retaining and hiring quality employees in Silicon Valley results in higher wage payout, 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.

Search Ads Revenue

According to our estimates, the search ads segment is the biggest of Yahoo’s operating segments and makes up approximately 14% of the company’s value.

During the quarter, search ad revenues decreased  by 10% year-over-year to $425 million. Search ads revenue declined in part due to the closure of its South Korean office. However, a tie up with Microsoft’s Bing search engine has lowered traffic acquisition (TAC) costs for Yahoo to 3.78% in Q1CY13 from 18% in Q1CY12. As a result, search ad revenues ex-traffic acquisition costs (TAC) increased by over 6% to $408 million.

In our article published earlier, we stated the importance of customized content and mobile platform for Yahoo’s ads revenue. (See: Better Customized Content Can Help Drive Growth For Yahoo!) Yahoo did report an increase of 16% in number of paid clicks across its properties due to better content. ^[2] However, a change in ad mix in favor of ads from emerging economies decreased price per click by 7%, which in turn lowered revenue per search (RPS). We expect the international mix of total searches to increase going forward, which should be a drag on overall RPS. Going ahead, we forecast RPS to decrease from $13.70 to $13 by the end of our forecast period.

Decline In Display Ads Revenue

While search advertisements constitute the majority of the company’s operating value, display advertising also contributes ~15% to total value.

During the Quarter, display ad revenues ex-TAC declined by over 11% to $402 million. The primary reason for the decline in display ads was the lower price per ads that declined by 2% in the quarter. Yahoo had revamped its websites in Q1 to boost user engagement by reducing the clutter on its properties and the number of ads. A lower number of ads together with lower price per ads translated to lower revenue per page view (RPM). Moreover, Yahoo has increased its focus on display ads for its mobile platform. Generally, advertiser pays less for mobile display ads. We believe that Yahoo’s push for improving the user experience and increasing content delivery over mobile platform will drag RPM lower going forward.

During the quarter Yahoo partnered with Google to place ads on various properties and co-branded sites using AdSense and AdMob. We expect this tie up to offset decline in RPM by increasing the number of relevant ads across Yahoo properties. We, therefore, forecast RPM to increase modestly from $1.40 to $1.43 by the end of our forecast period.

However, a more customized and clutter free website did arrest the decline in page view which declined at a slower rate in Q1 and the number of unique visitors across Yahoo properties jumped from 154 million in June 2012 to over 167 million in January 2013. ^[3] Moreover, after revamping its core websites, Yahoo’s total mobile unique visitor increased to 300 million in the quarter.

We believe that customized content deliverable across mobile platforms will be a key growth driver for Yahoo in the future. The number of unique visitors is vital for Yahoo’s display ad revenue as more people visiting the website generally translate into more pages viewed across Yahoo’s websites. We currently project the number of unique users across Yahoo’s properties to rise from 676 million to 770 million per year by the end of our forecast period.

Mobile Platform Hits 300 Million Unique Visitors

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 300 million. The mobile platform is an important point of focus for Yahoo! since it will drive organic user growth in the emerging markets where new members of the middle class are first accessing the Internet via their mobile phones.

Additionally, the mobile product line can also drive page views. Mobile devices are logging in higher web traffic than traditional PCs resulting in higher Internet page views. ^[4] 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. ^[5]

We currently have a $23 price estimate for Yahoo!, which is approximately inline with the current market price.

Click Here To Understand What Drives A Stock At Trefis

1. 8-K,SEC [↩]
2. Yahoo Q1 Earnings Transcript, April 17 2013, www.seekingalpha.com [↩]
3. Number of Unique Visitors to Yahoo, March 12 2013, www.statista.com [↩]
4. Tablets trump smartphones in global website traffic, March 6 2013, blogs.adobe.com [↩]
5. US on Track to Become Top Mobile Ad Market, eMarketer [↩]