Yahoo Earnings Preview: Will Shift To Mobile Boost Revenues In Q2?

Yahoo! (NASDAQ:YHOO) is set to report its second-quarter results on Tuesday, July 21st. The stock continues to underperform the market, post Alibaba’s listing on the U.S. stock exchange in the last quarter of 2014. The stock has declined by over 22% in first half of 2015, while the return on NASDAQ composite index is close to 8.7%. 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. Even though the company is aggressively targeting mobile devices, we believe that the company will continue to report little or no improvement in revenue growth from the organic business. However, 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. Additionally, revenue from inorganic sources might boost overall revenues.

See our complete analysis of Yahoo! here

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 the core business continues to elude Yahoo management, despite numerous product refreshes and acquisitions.

Display Ads Under Scanner

The display ads division makes up 5.6% of Yahoo’s estimated value. In Q1, the display ad revenues (ex-TAC) declined by 6.7% year over year to $381 million. While the number of display ads sold across Yahoo properties rose by 29%, largely 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, which 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 continued to impact display ads revenues in Q2 as well. However, inorganic revenue from the BrightRoll acquisition should offset the decline in organic revenues. Furthermore, Yahoo has stated that Mobile, Video, Native and Social ads (MVNS), which grew 58% year over year in Q1, are expected to help stem decline in display revenue in the future. As a result, we expect display revenue to decline only marginally in Q2.

Search Ads To Improve

Search ads make up 7.3% of Yahoo’s estimated value. In Q1, search ad revenues (ex-TAC) declined by to 2.8% $431 million, despite its contract with Mozilla that boosted its gross search revenues (including TAC). 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. Revenue growth eluded company as the product mix indicated more ads sales on mobile dvices, which have a lower cost per click compared to PC ads. We believe the trend continued in Q2 and that the monetization rate remained low as advertisers continue to limit their ad spending across Yahoo sites.

Mobile Audience To Boost Ad Served and Revenues

As we have noted, Yahoo’s display ads and search ads divisions make up 5.6% and 7.3% 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 issue, Yahoo is aggressively targeting mobile devices. As a result of past efforts, Yahoo’s mobile platform hit approximately 600 million unique visitors in Q1. 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 Q1, Yahoo’s mobile revenue was $234 million, up from $145 million in Q1 2014. 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).

We currently have a $43.99 price estimate for Yahoo!, which is 14% above the current market price.

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