Yahoo Earnings: Monetization Continues To Elude The Company Even As Focus Shifts To Mobile

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Yahoo! (NASDAQ:YHOO) reported its first-quarter earnings Tuesday, April 21st. The company’s core advertising revenues (including Traffic Acquisition Cost or TAC) improved by 8% year on year to $1.226 billion. However, revenues excluding TAC missed company’s guidance and declined by 4% to $1.04 billion, indicating that the company made little headway in its core business. Furthermore, the non-GAAP operating income declined by 47% to $80 million. Cash flow also suffered as the company satisfied the $3.3 billion income tax liability related to sale of Alibaba holding in 2014. [1] The only silver lining in the results was Yahoo performance in the up and coming Mobile, Video, Native and social (MVNS) ads vertical. While GAAP MVNS revenues (including TAC) grew by 58% to $363 million, non-Maven revenues declined by 7% to $744 million. Additionally, mobile revenue grew by 61.4% to $234 million while PC ads revenue declined by 1.6% to $873 million.

While Yahoo’s core search ad revenues (excluding TAC) declined by 2.8% to $431.65 million, its display ad revenues declined by 6.7% to $381.29 million in the quarter. Gross-search ads grew due to the Mozilla contract, and the company reported growth in all search metrics such as the price per click, click driven revenue and number of paid clicks. In this note, we will discuss the highlights of Yahoo’s earnings announcement.

See our complete analysis of Yahoo! here

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Outlook For Second Quarter 2015

For the second quarter, Yahoo expects revenues (ex-TAC) to be in $1.01-$1.05 billion range. Additionally, it expects adjusted EBITDA to be between $240 million and $260 million, and non-GAAP operating income to be between $90 million and $110 million. The guidance indicates that the much-needed improvement in core business continues to elude Yahoo management despite numerous product refreshes and acquisitions.

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 Q1, Yahoo’s mobile revenue was $234 million, up from $145 million in Q1 2014, an increase of 61% year over year. Furthermore, Yahoo continued to report growth in its total mobile unique visitors, which grew to over 600 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 5.2% of Yahoo’s estimated value. In Q1, the display ad revenues (ex-TAC) declined by 6.7% year over year to $381 million (excluding traffic acquisition cost). While the number of display ads sold across Yahoo properties rose by 29% due to assimilation of BrightRoll, the price per ad declined by 17% 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 MVNS ads grew BY 58% year-over-year in Q1 2015, 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 6.7% of Yahoo’s estimated value. Despite its contract with Mozilla that boosted its gross search revenues (including TAC), search ad revenues (ex-TAC) declined by to 2.8% $431 million. While the company reported 21% growth in the number of paid clicks, price per click improved by 3%, indicating the relevancy and improvement in Yahoo’s content as users used Yahoo for their search queries. However, low growth of price per click indicates that monetization rate remains low and advertisers continue to limit their ad spending across Yahoo sites. Furthermore, 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. Going forward, we estimate RPS will decline from $11 to $10.

Update On Investments

Yahoo stated that it was on course to spinoff Alibaba stake into a separate entity called SpinCo by the end of this year. However, it also stated that it has no such plans for Yahoo! Japan in which it holds 23% stake.

Over the course of last two years, Yahoo has invested in social, Video and mobile ad companies. While Yahoo acquired Tumblr in May of 2013 for $1.1 billion, it acquired BrightRoll (with video programmatic ads) and Flurry (with mobile and video ads) last year. The company stated that Tumblr is the fastest growing social network over the preceding six months, and that growth continued in Q1. Tumblr witnessed its audience rise from 460 million in Q4 2014 to 475 million in Q1, up approximately 3% quarter over quarter. During Q3 2014 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. It has reiterated its stand in this earnings. Assimilation of BrightRoll and Flurry platform into Gemini market place, which reported $110 million revenues for Q1, is underway. Going forward, if Yahoo can successfully pitch its Tumblr , Gemini and BrightRoll 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 $47.55 price estimate for Yahoo!, which is 7% above the current market price.

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Notes:
  1. 8-K, SEC []
  2. See Yahoo Earning Preview: Revenue Growth From Display And Mobile In Focus []
  3. Earnings Transcript Q1 2015 []