Yahoo! (NASDAQ:YHOO) reported its third quarter earnings on Tuesday, October 15. The company posted a 1% year-on-year decline in net revenues (excluding Traffic Acquisition Cost, or TAC) to $1.08 billion. However, the non-GAAP operating income declined by 27% to $173 million, and Non-GAAP net income declined by 24% to $358 million during the quarter.  The company continuese to invest heavily in building out its many businesses.
Yahoo’s core display ad revenues (excluding Traffic Acquisition Cost) continued to suffer and decreased by 7% year on year to $452 million. However, its search ad revenues (ex-TAC) grew by 3% year to year to $426 million, primarily due to lower Traffic Acquisition Cost (TAC) in the quarter. However, Yahoo’s investment in Alibaba and Yahoo! Japan continued to reap benefits for the company.
During the third quarter, Yahoo made eight acquisitions to strengthen its product and content offerings. Moreover, Yahoo announced the launch of new advertising formats to bolster its ad revenues in the future. Furthermore, the company attracted a record number of users to its properties during the quarter. We believe that the company can increase its revenues in the coming quarters if it can monetize its increasing user base and content effectively.
Outlook For Fourth Quarter And Full Year 2013
For the fourth quarter, Yahoo expects revenues (ex-TAC) to be in $1.18-$1.22 billion range. Additionally, it expects adjusted EBITDA to be between $400 million and $420 million, and non-GAAP operating income to be between $240 million and $260 million. Due to the decline in revenues during the first half of the year, Yahoo has revised its full-year guidance lower. For 2013, Yahoo now expects revenues (ex-TAC) to be $4.4 billion to $4.45 billion, adjusted EBITDA to be $1.48 billion to $1.5 billion, and non-GAAP operating income to be $840 million to $860 billion.
Larger Stake In Alibaba To Boost Yahoo’s value
According to its third-quarter earnings announcement, Alibaba generated $1.7 billion in revenues, $856 million in operating income and $717 million in net income during Q2 2013. The company announced an amendment to its share repurchase with Alibaba on Tuesday, which reduces the maximum number of shares that the company is required to sell in a qualified Initial Public Offering to 208 million shares from 261.5 million. We believe that this will positively impact Yahoo as it can now gain more from any potential upside to Alibaba’s valuation post IPO.
Search Ads Metrics Improves
According to our estimates, the Search Ad segment is the biggest component of Yahoo’s aggregate valuation and makes up just over 12% of the company’s value.
During the quarter, Search Ad revenues (including TAC) fell by 8% year-over-year to $435 million. Search ads revenue declined in part due to the closure of its South Korean office. However, the closure of its South Korean office positively impacted traffic acquisition cost which declined to $9 million in the third quarter from $60 million in the same period in previous year.
During the quarter, Yahoo redesigned its websites including Yahoo Sports and Yahoo Games, as well as TV, music, weather, movies, and Yahoo omg! to improve user experience and increase the number of searches across these Yahoo properties. As a result, Yahoo reported over 20% growth in the number of paid clicks within this extended family of websites.  Moreover, a change in ad mix in favor of ads from emerging economies led the price per click to decline by 4%, which in turn lowered revenue per search (RPS). We expect the international mix of total search to increase going forward, which should be a drag on overall RPS. Going forward, we estimate RPS will decline from $13.50 to $13 by the end of our forecast period.
Redesign Boosts Unique User Count
Display advertising contributes just about 11% to its total value according to our model. During the quarter, display ad revenues ex-TAC declined by 7% to $421 million. The primary reason for the decline in display ads was 7% year-on-year decline in the price –per-ad sold across Yahoo properties.
Yahoo has taken prudent steps to bolster its display ad revenues going forward. The company introduced new ad format in the quarter that helped the company to post a 1% year-over-year increase in the number of ads sold. Additionally, Yahoo began offering more premium content through its partnerships with leading news and entertainment brands, such as ABC News and CNBC. A rich content portfolio is important for the company as it engages more users and thus drives the growth in unique visitors across its websites. The company reported that the number of unique users across Yahoo’s properties increased to over 800 million in the quarter. While the company has yet to adequately monetize this increase in user count, we believe that future looks bright as the company was able to attract new advertisers during the quarter. 
Mobile Platform Hits 390 Million Unique Visitors
In an earlier article, we argued that Yahoo’s mobile platform will drive its revenue growth going forward.  Yahoo continued to report growth in its total mobile unique visitors, which grew to 390 million in the quarter. The growth in its unique visitor count is important for Yahoo as a bigger user base will consume more content across Yahoo’s websites. This, in turn, will translate into higher page views and searches across all Yahoo platforms.
Additionally, we believe that a strong mobile platform is important for Yahoo as it can bolster Yahoo’s revenue by capturing a substantial piece of the global mobile advertising market, which will stand at approximately $33 billion in 2015, according to Publicis-owned ad agency ZenithOptimedia. 
We currently have a $29 price estimate for Yahoo!, which is 10% below its current market price.Notes:
- 8-K,SEC [↩]
- Yahoo Q3 Earnings Transcript, October 15 2013, www.seekingalpha.com [↩]
- Earnings Transcript, www.seekingalpha.com [↩]
- See Yahoo Earnings Preview: Monetization Rate And Mobile Ads Revenue In Focus [↩]
- 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 [↩]