Yahoo Earnings: Mobile And Windfall profits From Alibaba Sale Boost Results

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Yahoo! (NASDAQ:YHOO) reported its third quarter earnings Tuesday, October 22. The company’s core advertising revenues continued to disappoint as the revenues (excluding Traffic Acquisition Cost or TAC) increased marginally by 1% year on year to $1.094 billion. However, the non-GAAP operating income declined by 10% to $156 million. [1] While Yahoo’s core search ad revenues (excluding TAC) improved by 6% year over year, its display ad revenues declined by 6%. The primary reason for growth in search ads revenue was the growth in the price per click. Additionally, sale of Yahoo’s 140 million shares in Alibaba boosted its cash position by $7 billion to $12 billion. The highlight of the earnings release was the growth in mobile revenues, which exceeded $200 million in Q3 and are expected to be over $1.2 billion for the full year. Yahoo attracted a record number of mobile users to its properties during the quarter. While Yahoo’s mobile platform continues to gain traction, it has now forayed into online mobile ad technology with the acquisition of Flurry. In this note, we will discuss the highlights of Yahoo’s earnings announcement.

See our complete analysis of Yahoo! here

Outlook For Fourth Quarter

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For the fourth quarter, Yahoo expects revenues (ex-TAC) to be in $1.14-$1.18 billion range. Additionally, it expects adjusted EBITDA to be between $340 million and $380 million, and non-GAAP operating income to be between $190 million and $230 million.

Mobile Ads Revenues Gain Traction

In our pre earnings note, 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 550 million in the quarter. [3] The growth in mobile user base also translated into growth in mobile revenues as the company posted $200 million in GAAP revenue. In the coming quarters, we expect the mobile user base to increase further as the company implements its strategy to deliver personalized content. 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, and thus improve revenue across both display and search ad divisions.

Furthermore, the Gemini marketplace for mobile devices, which was launched six quarters ago, and unites mobile search with a native ad buying platform, raked in $65 million revenues in Q3. 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]

Buyback Intensifies As Alibaba Stake Sale Strengthens Balance Sheet

At present, the cash and equivalents on company’s balance sheet stands at over $12 billion, primarily due to  receipt of the Alibaba pre tax IPO proceeds of $9.4 billion. While the company netted approximately $6 billion after taxes from Alibaba’s IPO, it plans to return $3 billion to shareholders. Considering that over the past two year, Yahoo has returned $7.7 billion to shareholders using share buybacks, we expect that it will return the proceeds from stake sale by buying back more shares in the coming quarters. We believe that this will improve earnings per share, and can increase company’s per share value in the future.

Improvement In Ad Volume And Price Per Click Buoys Revenues

Search ads make up 10% of Yahoo’s estimated value. During the quarter, search ad revenues (ex-TAC) grew by 6% year over year to $450 million. While the company reported no growth in the number of paid clicks, price per click improved by 17%, indicating the relevancy and improvement in Yahoo’s content as advertisers increased their search ad spending across Yahoo sites. We expect these trends to continue in the coming quarters as advertisers increase spending across Yahoo sites search. Going forward, we estimate RPS will decline from $13 to $12.

Display Ads Revenue Disappoints

The display ads division makes up 10% of Yahoo’s estimated value. In Q3, the display ad revenues (ex-TAC) declined by 6% year over year to $396 million. While the number of display ads sold across Yahoo properties rose by 24%, the price per ad declined by 24% due to unfavorable shift in mix of premium ads to low cost ads. Even though the company continues to roll out premium display content, it is yet to be fancied by advertisers who continue to spend less across Yahoo properties. Furthermore, we expect the international mix of total display ads to increase that can drag ad prices down. Going forward, we expect revenue per impression to remain flat.

Positive Surprise From Investment In Tumblr

Yahoo acquired Tumblr in May last year for $1.1 billion. During the earnings call, Marissa Mayer said that Tumblr is expected to generate more than $100 million in revenue in 2015, primarily due to a successful introduction of sponsored advertising. Additionally, she said that Tumblr will achieve positive earnings before interest, tax and depreciation (EBITDA) next year on the back of strong audience growth, which has grown 40% to 420 million users, and strong monetization. This announcement positively surprised the market, and the stock trade up to close with a 4.5% gain on the day.  Going forward, if Yahoo can successfully pitch Tumblr platform to advertisers, its advertising revenues and valuation can increase significantly.

We are in the process of updating our model. At present, we have a $41.53 price estimate for Yahoo!, which is in line with the current market price.

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Notes:
  1. 8-K, SEC []
  2. See Yahoo Earnings Preview: What We Are Watching []
  3. Earnings Transcript Q3 2014 []
  4. Mobile Ad Market Spending To Hit $18 bn In 2014, Rising To ~$42 bn By 2017, January 21 2014, www.techcrunch.com []