Yahoo Earnings Preview: Ad Revenues And Growth In Associate Companies In Focus

Yahoo! (NASDAQ:YHOO) is set to report its fourth quarter and full year earnings on January 28. While the company’s stock outperformed the market in 2013, primarily due to investment in associate companies Alibaba and Yahoo! Japan, its core ads revenues continued to decline. In Q3, its display ads revenues decreased by 7% year over year to $452 million and search ads revenues (including traffic acquisition cost) declined by 8% to $418 million.

The company continues to launch new products and redesign its websites to improve user experience and boost its unique visitor count. However, despite these efforts, Yahoo has failed to monetize its websites effectively. It recently announced the launch of a new ad tech platform that aims to boost monetization rates. ^[1] In the upcoming earnings announcement, we continue to closely follow the search and display ads revenue divisions. Furthermore, we expect that its associate companies will continue to report strong growth, which will buoy its bottom line.

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Mobile Key To Ad Revenue Growth

Yahoo’s display ads and search ads divisions make up 13% and 14% of its value, respectively, according to our estimates. Both these divisions have witnessed a decline in revenues. Yahoo is addressing this decline by focusing on developing and delivering content on its mobile platform. According to ZenithOptimedia, mobile advertising is expected to grow to $33 billion by 2015, and will account for over 25% of Internet spending. ((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))

Yahoo’s mobile platform hit approximately 390 million unique visitors in Q3. This growth was instrumental in increasing its page views as the increase in web traffic translates to more consumption of content across Yahoo properties. In the upcoming earnings announcement, we will be closely monitoring the growth in unique mobile visitors which will indicate whether Yahoo has been able to engage more users across its mobile platform, and thereby improve revenues from its display ads business. Additionally, we want to know what impact the growth in search on mobile devices will have on Yahoo’s revenue per search (RPS).

Focus on Video Display Ads

In first half of Q4, Yahoo inked a deal with Starcom that gives the latter exclusive access to Yahoo’s “first-party” data on visitors as well as content. Through this deal Yahoo aims to provide targeted video ads that will improve user experience and bring in much-needed ad dollars for its content. As Yahoo enhanced user engagement through this deal, we expected monetization to improve, resulting in higher revenue per page view (RPM). In this earnings announcement, we want to know whether this improvement did materialize. Currently, we estimate Yahoo’s RPM at $1.20 per 1,000 impressions.

Associate Companies To Boost Bottomline

The primary reason for Yahoo’s rich valuation is its investment in high growth businesses, Alibaba and Yahoo! Japan, in Asia. Alibaba generated $1.7 billion in revenues, $856 million in operating income and $717 million in net income during Q2 2013. On the other hand, Yahoo! Japan generated $920 million (JPY 95 billon) in revenues and $480 million (JPY 49.23 billion) in operating income in Q3. We expect this trend to continue in the upcoming quarterly results. We believe that this will positively impact Yahoo’s bottom-line and will buoy its overall results.

We currently have a $31.17 price estimate for Yahoo!, which is approximately 25% below the current market price.

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1. See Yahoo Steps Up Product And Platform Launch To Boost Its Revenues [↩]