Yahoo Earnings Preview: What We Are Watching

Yahoo! (NASDAQ:YHOO) is set to report its third quarter results on Tuesday, October 21. The stock performed exceedingly well from mid-summer as the price soared from $33 to $41 post the listing of Alibaba’s American depository receipts (ADR), through which it raised close to $25 billion. However, its core ads business continues to lag the industry despite numerous website and product refreshes. And with the decline in broader market, the stock has settled at $38 recently. While the company reported a 3% year-on-year decline in Q2 in net revenues (excluding Traffic Acquisition Cost or TAC) to $1.040 billion, its non-GAAP operating income declined by 72% to $38 million. 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 the mobile segment as the company continues to push for more services in this domain. Furthermore, the company has made windfall profit through Alibaba’a listing, and we expect the company to discuss how it plans to use the cash in the coming quarters.

See our complete analysis of Yahoo! here

Outlook For Third Quarter

For the third quarter, Yahoo guided revenues (ex-TAC) to be in $1.06-$1.1 billion range. Additionally, it guided adjusted EBITDA to be between $220 million and $360 million, and non-GAAP operating income to be between $70 million and $110 million.

Mobile Audience To Boost Ad Served and Revenues

Yahoo’s display ads and search ads divisions make up 10.4% and 10.2% of its value, respectively, according to our estimates. Both these divisions have struggled for substantial growth in revenues due to the stiff competition from companies such as Google and Microsoft. To address this decline, Yahoo is acquiring companies with the objective of integrating the underlying technology into its products, thus improving its mobile platform. As a result of past efforts, Yahoo’s mobile platform hit approximately 450 million unique visitors in Q2 2014. Furthermore, as the company has focused on developing and delivering content on its mobile platform, user  engagement has improved and the time spent on mobile has gone up by 79% year over year in Q2. This growth was instrumental in increasing its page views as it 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).

Focus on Monetization

One of the key factors for the decline in Yahoo’s core businesses of display and search ads is low monetization rates. While the company continues to retool its properties (mostly with technologies from acquired companies) with the aim of improving user experience, it has recently taken some steps to boost its monetization rate. Recently, it has rolled out new ad format, acquired ad technology company Flurry and appointed Kevin Gentzel, formerly chief revenue officer at the Washington Post, as its new head of advertising sales to boost the monetization rate for its properties. An increase in monetization rate is key to Yahoo’s revenue growth, as online ad revenues are expected to grow to over $121 billion in 2014. ^[1] In 2013, Yahoo’s online ads market share was nearly 4% based on $104 billion spent on online ads. Considering that revenue from internet ads revenues is expected to increase to $160.6 billion by 2016, if Yahoo can increase its market share to 4.5% in 2016, with an improvement in monetization rate, then its revenues can rise to $7 billion. Therefore, in this earnings announcement, we want to know more about Yahoo’s strategy to boost its monetization rate, especially how it plans to empower Kevin Gentzel to boost its revenues.

Use Of Cash Beyond The Acquisitions

Post sale of its stake in Alibaba, through which it cash potion swelled by $6 billion, Yahoo has over $8 billion in cash. While the company plans to return nearly $3 billion to shareholders through stock buyback, it remains to be seen whether the company might announce a bigger buyback or dividend in the upcoming results. Furthermore, we want company to disclose how it plans to use the cash on hand to boost its revenues going forward. We note as well the possibility the company will comment on its communications with Starboard Value LP, whihc has advocated a range of actions to improve shareholder value. ^[2]

We currently have a $41.53 price estimate for Yahoo!, which is 10% above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Internet Ad Spend To Reach $121B In 2014, 23% Of $537B Total Ad Spend, Ad Tech Boosts Display, April 7 2014, www.techcrunch.com [↩]
2. In September, Yahoo acknowledged the receipt of a letter from this investor. [↩]