Yahoo Earnings: Will Revenue Growth Woes Continue?

Yahoo! (NASDAQ:YHOO) is set to report its second quarter results on July 15th. After rising by over 80% in 2013, the stock has flat lined in the first half of 2014. The primary reason for this has been the lackadaisical topline performance coupled with a slowdown in the exponential growth in associated companies, i.e. Alibaba and Yahoo! Japan, in which it holds substantial stakes. The company is trying to revive growth across its business verticals by collating technology from the companies it has acquired over the past two years into its product. ^[1]

While the company reported a 1% year-on-year growth in net revenues (excluding Traffic Acquisition Cost or TAC) to $1.087 billion, its non-GAAP operating income declined by 33% to $149 million in Q1. In this earnings announcement, we believe that company will continue to report little or no improvement in revenue growth. However, we continue to closely monitor the search and display ads divisions for growth in revenues, especially from mobile verticals as the company continues to push for more services in this domain. Furthermore, we expect that its associate companies will continue to buoy its bottom line.

See our complete analysis of Yahoo! here

Outlook For Second Quarter

For the second quarter, Yahoo expects revenues (ex-TAC) to be in $1.12-$1.16 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.

Mobile Audience To Boost Ad Served and Revenues

Yahoo’s display ads and search ads divisions make up 12.1% and 15.0% of its value, respectively, according to our estimates. Both these divisions have struggled for substantial growth in revenus due to the stiff competition it faces from companies such as Google and Microsoft. Yahoo has taken two prong approach to address this decline. Firstly, it is adopting technology from acquired companies to improve its mobile platform. Secondly, it is focusing on developing and delivering content on its mobile platform. Yahoo’s mobile platform hit approximately 450 million unique visitors in Q1 2014. 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 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).

Video Display Revenues In Focus

Ever since Marissa Mayer, the CEO of Yahoo, assumed the helm, she has been advocating development of a mobile platform to counter the decline in revenues from display ads and search ads divisions. However, recent news suggests that the management is launching its own platform of video services that will directly compete with YouTube. Furthermore, the company has intensified its efforts to build a repository of original video programming that typically are shown on high end cable-TV network and streaming services such as Netflix. In this earnings announcement, we want to know the progress the company has made in this direction and its strategy to leverage its core web properties to monetize its video offerings. According to our estimates, YouTube made around $3.7 billion in net revenues in 2013, and will rake in around $4.7 billion this year. If Yahoo’s planned service can even make 10% of this estimated value, its top line can increase by $500 million. ^[2]

Will Associate Companies Boost Bottom line In Q2?

The primary reason for Yahoo’s rich valuation is its investment in high growth businesses, Alibaba and Yahoo! Japan in Asia. The associate companies continue to post growth in revenues, albeit at a slower rate. 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 $34.78 price estimate for Yahoo!, which is in line with the current market price.

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1. Read more about it in Yahoo Collates Technology From Acquisitions To Strengthen its Offering [↩]
2. Read more about this here [↩]