Yahoo Earnings: Revenues Continue To Lag As Yahoo Firms Up Plans To Spin Off Alibaba

Yahoo! (NASDAQ:YHOO) reported its fourth quarter earnings Tuesday, January 27th. The company’s core advertising revenues continued to disappoint as the revenues (excluding Traffic Acquisition Cost or TAC) decreased marginally by 1% year on year to $1.253 billion. Furthermore, the non-GAAP operating income declined by 80% to $32.15 million. ^[1] For the full year 2014, revenues declined by 1.33% from $4.68 billion in 2013 to $4.61 billion.

While Yahoo’s core search ad revenues (excluding TAC) were flat for the quarter, its display ad revenues declined by 5.34%. The primary reason for growth in search ads revenue was the growth in all search metrics such as the price per click, click driven revenue and number of paid clicks. The highlight of the earnings release was not the questions concerning growth in its core business, but news pertaining to spinning off the 384 million shares of Alibaba into an independently registered investment company to be named SpinCo. In this note, we will discuss the highlights of Yahoo’s earnings announcement.

See our complete analysis of Yahoo! here

Outlook For First Quarter 2015

For the first quarter, Yahoo expects revenues (ex-TAC) to be in $1.11-$1.15 billion range. Additionally, it expects adjusted EBITDA to be between $200 million and $240 million, and non-GAAP operating income to be between $50 million and $90 million. The guidance indicates that the much-needed improvement in core business continues to elude Yahoo management despite numerous product refreshes and acquisitions.

Spinoff To Be Tax Tax-Free

Yahoo! owns a total of 384 million ADRs of Alibaba, which comprises 15.4% of Alibaba and is worth nearly $40 billion based on Monday’s closing Alibaba share price. With the Alibaba ADR listing in Q3 last year, these shares became subject to a one-year lock-up agreement that runs until September 21, 2015. If these shares were to be sold or transferred through ordinary means, the proceeds will be subject to a tax of approximately 40%. This will translate into a tax liability of approximately $16 billion or roughly $16 per share of Yahoo!.  In a landmark decision, Yahoo! board has authorized a plan to pursue a tax-free spin-off of 100% of the company’s remaining holdings in Alibaba. The company expects to effectuate the spin-off in Q4 of 2015. This will result in two independent publicly traded companies. The spin-off company, which has been christened SpinCo, will be a newly formed independently registered investment company that will hold 384 million shares of Alibaba.

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] In Q4, Yahoo’s mobile revenue was $254 million, up from $207 million in Q3, an increase of 23% quarter over quarter.  Gross revenue for the year was $1.260 billion and GAAP mobile revenue was $768 million, exceeding Yahoo’s estimates by 5% and 10% respectively. Furthermore, Yahoo continued to report growth in its total mobile unique visitors, which grew to over 575 million in the quarter. ^[3] 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 ads divisions.

Display Ads Revenue Disappoints Yet Again

The display ads division makes up 9.3% of Yahoo’s estimated value. In Q4, the display ad revenues (ex-TAC) declined by 5.34% year over year to $464 million (excluding traffic acquisition cost). While the number of display ads sold across Yahoo properties rose by 17%, the price per ad declined by 24% due to the unfavorable shift in mix of premium ads to low cost ads. Even though the company continues to roll out premium display content, it has 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, which can drag ad prices down. However, Yahoo has stated that Mobile, Video,Native and Social ads, which grew 95% to 100% year-over-year in Q4, are expected to help stem decline in display revenue in the future. As a result, we expect revenue per impression to remain flat in the future.

Improvement In Ad Volume And Price Per Click Boost Search Revenues

Search ads make up 9% of Yahoo’s estimated value. During the quarter, search ad revenues (ex-TAC) were flat at $462 million. While the company reported 10% 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. Despite the overall improvement in search revenue metrics, the revenue growth eluded company as the product mix indicated more ads sales on mobile that has a lower cost per click compared to PC ads. During Q4, Yahoo struck five-year partnership with Mozilla to make Yahoo! the preferred search tool on Firefox browsers across mobile and desktop. This is a significant opportunity for Yahoo as Firefox has 11% share in global browser market. We expect this will help Yahoo to increase revenue in the coming quarters. Going forward, we estimate RPS will decline from $11 to $10.

Update On Tumblr

Yahoo acquired Tumblr in May last year for $1.1 billion. The company stated that Tumblr overtook Instagram as the fastest growing social network over the preceding six months, and that growth continued in Q4. The company also witnessed Tumblr audience rise from 420 million in Q3 to 460 million in Q4, up approximately 9% quarter-over-quarter.  During Q3 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) in 2015. 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 $47.29 price estimate for Yahoo!, which is in line with the current market price.

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1. 8-K, SEC [↩]
2. See Yahoo Earnings Preview: Mobile Ads And Monetization Of Content In Focus [↩]
3. Earnings Transcript Q4 2014 [↩]