Yahoo Earnings Preview: Mobile Ads And Monetization Of Content In Focus

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Yahoo! (NASDAQ:YHOO) is set to report its fourth quarter results on Tuesday, January 27th. The stock performed exceedingly well from mid-summer as the price soared from $33 to $50 post the listing of Alibaba’s American depository receipts (ADRs), through which it raised close to $25 billion. However, its core ads business continues to lag the industry, despite numerous website and product refreshes. Additionally, during the quarter, the company acquired BrightRoll for $640 million in cash. [1] While the company reported a 1% year-on-year decline in Q3 in net revenues (excluding Traffic Acquisition Cost or TAC) to $1.094 billion, its non-GAAP operating income declined by 10% to $156 million. In this earnings announcement, we believe that company will continue to report little or no improvement in revenue growth from organic business. However, the BrightRoll acquisition will boost display revenues. Additionally, we continue to closely monitor the search and display ads divisions for growth in revenues from the mobile segment as the company continues to push for more services in this domain. Furthermore, we expect the company to disclose how it plans to use the cash from the Alibaba listing in the coming quarters during this 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 Audience To Boost Ad Served and Revenues

Yahoo’s display ads and search ads divisions make up 9.3% and 9.1% 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 550 million unique visitors in Q3 2014. Furthermore, as the company has focused on developing and delivering content on its mobile platform, user engagement has improved. 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 both the ad technology company Flurry and the video ads platform BrightRoll. An increase in monetization rate is key to Yahoo’s revenue growth, as online ad revenues are expected to grow to over $213 billion by 2018. [2] For  2014, we estimate Yahoo’s online ads market share will have been nearly 3.1% (once it is reported), based on $140 billion spent on online ads. Considering that revenue from internet ads revenues is expected to increase to $160.18 billion by 2015, if Yahoo can improve its market share to 3.2% in 2015, with an improvement in monetization rate, then its revenues can rise to $5.12 billion. Therefore, in this earnings announcement, we want to know more about Yahoo’s strategy to boost its monetization rate.

We currently have a $47.29 price estimate for Yahoo!, which is inline with the current market price.

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Notes:
  1. Read more about it here []
  2. Global Ad Spending Growth to Double This Year, July 19 2014, www.emarketer.com []