Yahoo Earnings: Downtrend In Ad Revenues Continue

by Trefis Team
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Yahoo! (NASDAQ:YHOO) reported its fourth quarter earnings Tuesday, January 28. The company posted a 2% year-on-year decline in net revenues (excluding Traffic Acquisition Cost or TAC) to $1.2 billion. Furthermore, the non-GAAP operating income declined by 8% to $174 million and Non-GAAP net income increased by 17% to $482 million during the quarter. [1] The company continues to invest heavily to bolster its core ads business and build a robust mobile platform.

Yahoo’s core display ad revenues (excluding TAC) continued to suffer and decreased by 6% year on year to $591 million. However, its search ad revenues (ex-TAC) grew by 8% year-on-year to $461 million. Additionally, Yahoo’s investment in Alibaba continued to reap benefits for the company as revenues grew by 55% year over year. During the fourth quarter, Yahoo acquired eight companies to strengthen its product, content offerings and technology. The company also 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.

See our complete analysis of Yahoo! here

Outlook For First Quarter And Full Year 2014

For the first quarter, Yahoo expects revenues (ex-TAC) to be in $1.06-$1.10 billion range. Additionally, it expects adjusted EBITDA to be between $290 million and $330 million, and non-GAAP operating income to be between $130 million and $170 million. While the company has refrained from giving any guidance for 2014, it will continue to invest and expects the momentum to pick up in latter half of this year.

Alibaba Continues To Report Growth

According to Yahoo’s fourth-quarter earnings announcement, Alibaba generated $1.78 billion in revenues, $786 million in operating income and $801 million in net income during Q3 2013. While the company continues to post growth, it has slowed down. Considering the impending IPO of Alibaba, the revenue growth rate has negatively impacted investor sentiments. However, we believe that Alibaba’s valuation will continue to bolster Yahoo’s investment value.

Pricing Pressure On Ads Continue

While search ads makes up 14% of Yahoo’s estimated value, display ads contributes 13% of its value. During the quarter, Search Ad revenues (including TAC) fell by 4% year over year to $464 million, while display ads declined by 6% to $553 million.

The company reported over 15% growth in the number of paid clicks for search ads, and 3% growth in number of ads sold for its display ads division. However, the price per click declined by 3% and price per ad fell 7%. We expect this trend to continue in the coming quarters as advertisers shift their ad budget to new avenues such as mobile ads, which garner lower pricing. Furthermore, we expect the international mix of total search and display to increase, which should be a drag on ad pricing. Going forward, we estimate RPS will decline from $13 to $12, and revenue per impression to remain flat.

Mobile Boosts Unique Visitor Count

In an earlier article, we argued that Yahoo’s mobile platform will drive its revenue growth going forward. [2] Yahoo continued to report growth in its total mobile unique visitors, which grew to over 400 million in the quarter. [3] 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 $42 billion in 2017, according to Gartner. [4]

We are in the process of updating our Yahoo model. At present we have a $31.17 price estimate for Yahoo!, which is 20% below its current market price.

See More at Trefis View Interactive S&P Capital IQ Analyses (Powered by Trefis)

 

Notes:
  1. 8-K, SEC []
  2. See Yahoo Earnings Preview: Ad Revenues And Growth In Associate Companies In Focus []
  3. Earnings Transcript Q4 2013 []
  4. Mobile Ad Market Spending To Hit $18 bn In 2014, Rising To ~$42 bn By 2017, January 21 2014, www.techcrunch.com []
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