Yahoo! (NASDAQ:YHOO) is set to report its third quarter earnings on October 15. While the company’s stock outperformed the market in 2013, primarily due to its investment in Alibaba and Yahoo! Japan, its core ads revenues continue to suffer. In Q2, its display ads revenues decreased by 11% y-o-y to $471 million, and search ads revenues (including Traffic Acquisition Cost) declined by 9% to $418 million.
The company has recently redesigned many of its properties to drive web traffic.  However, despite the improvement in key measurement metrics such as unique visitor count, the ad revenues are yet to pick up. One of the primary reasons for this is Yahoo’s under-monetized properties. In this earnings announcement, we expect the management to discuss its plans to monetize its properties. Additionally, Yahoo is also in the middle of developing a stronger mobile platform. In this earning announcement, we will be closely monitoring the effect of mobile platform on its ads revenues.
Monetization of Properties To Drive Ad revenues
Yahoo’s core businesses of display and search ads are struggling due to intense competition and low monetization rates. Although, the recently redesigned home page has augured well for the company as it surpassed Google to reclaim the top spot in web traffic with over 196 million unique visitors in July, this growth in traffic is yet to translate into growth in revenues.
We believe that redesigning of Yahoo properties is central to turning around the ailing company, as this can substantially increase the unique user count by improving user experience in the future. However, the company needs to improve its monetization rate so as to improve its revenue. During the quarter, Yahoo took some steps to improve its monetization rate by launching new ad formats for its redesigned websites.  We want to know whether this format did help the monetization rate of the newly designed properties. We will also be on a lookout for any new plans that the company might disclose for increasing the monetization rate of its properties.
Increase in monetization rate is key to Yahoo’s revenue growth as online display ads revenues are expected to account for over 20% of all ad spend ($503 billion) this year. Additionally, online ad revenues are expected to grow to over $131 billion by 2015.  In 2012, Yahoo’s online ads market share was nearly 4% based on $85 billion spent on online ads. If Yahoo can increase its market share to 5% in 2015 due to improvement in monetization rate, its revenues can rise to $7 billion.
Focus on Mobile Platform
Yahoo is also addressing the decline in its ads revenues by increasing its focus on developing and delivering content across its mobile platform. It acquired a number of companies this year to bolster its offering on mobile devices. According to ZenithOptimedia, mobile advertising was worth $8.3 billion in 2012, or 9.5% of Internet expenditure.  Furthermore, ZenithOptimedia forecasts this total to rise to $33.1 billion, which is 25.2% of Internet expenditure by 2015. We believe that mobile will be key to Yahoo’s long term health. In Q2, Yahoo’s total mobile unique visitors hit approximately 340 million. According to Q2 earnings announcement, Yahoo has increased its focus on display ads for its mobile platform. In this earnings announcement, we will continue to closely monitor mobile display ads revenues.
As the number of users on its mobile platform grows, more content will be consumed across Yahoo’s websites leading to higher page views and searches across all Yahoo platforms. In this earnings announcement, we want to know the impact on Yahoo’s revenue per search (RPS) due to growth in search from mobile devices. Additionally, we will be closely monitoring the growth in unique mobile visitors that will indicate whether Yahoo has been able to engage more users across its mobile platform.
We currently have a $29 price estimate for Yahoo!, which is 15% below the current market price.Notes:
- See Yahoo’s Redesigned Web Pages Are Paying Off [↩]
- Introducing New Opportunities With Yahoo! Stream Ads, August 27 2013, advertising.yahoo.com [↩]
- Digital Ads Will Be 22% Of All U.S. Ad Spend In 2013, Mobile Ads 3.7%; Total Global Ad Spend In 2013 $503B, September 30 2013, www.techcrunch.com [↩] [↩]