Yahoo Earning Preview: Revenue Growth From Display And Mobile In Focus

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Yahoo! (NASDAQ:YHOO) is set to report its first-quarter results on Tuesday, April 21st. The shares have under-performed the market  for the first three months of this year, post Alibaba’s listing on the U.S. stock exchange in the last quarter of 2014. The stock has declined by over 7% in Q1, while the return on NASDAQ composite index is close to 7%. One of the primary reasons for this under-performance has been Yahoo’s core business, which has failed to deliver the necessary traction in revenues in the online ads industry. While the online advertising revenue in the U.S. rose by 16.9% annually in Q3 2014 to $12.4 billion, according to reports by the Interactive Advertising Bureau (IAB) and PwC US, Yahoo’s gross ad revenues declined by 1.3% to $4.61 billion in 2014. [1] 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, which occurred in Q4 2014, 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 the progress it has made on the planned Alibaba investment spin-off   during this earnings announcement.

See our complete analysis of Yahoo! here

Outlook For First Quarter 2015

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For the first quarter, Yahoo expects revenues (ex-TAC, or excluding Traffic Acquisition Costs) 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.

Display Ads Under Scanner

The display ads division makes up 5.2% of Yahoo’s estimated value. In Q4, the display ad revenues (ex-TAC) declined by 5.34% year over year to $464 million. 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. We believe that these trends will continue to impact display ads revenues in Q1 as well. However, inorganic revenue from the BrightRoll acquisition should boost revenues for  the division. Furthermore, 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 organic revenue to decline marginally in Q1.

Mobile Audience To Boost Ad Served and Revenues

Yahoo’s display ads and search ads divisions make up 5.2% and 6.7% 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 aggressively targeting mobile devices and acquiring companies with the objective of integrating the underlying mobile technology into its products. As a result of past efforts, Yahoo’s mobile platform hit approximately 575 million unique visitors in 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 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. 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).

SpinCo Details And Progress

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. In this earnings announcement, we continue to monitor the developments around this proposed plan.

We currently have a $47.55 price estimate for Yahoo!, which is inline with the current market price.

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Notes:
  1. Q3 2014 Internet Advertising Revenues Hit $12.4 Billion, Making it the Highest Quarter on Record, Interactive Advertising Bureau, December 18, 2014 []