Yahoo Earnings: MVNS Boosts Revenues Even As Core Search Continues to Suffer

Yahoo! (NASDAQ:YHOO) reported its second-quarter earnings Tuesday, July 21st. ^[1] The company’s core advertising revenues (including Traffic Acquisition Cost or TAC) improved by 14.5% year on year to $1.243 billion. However, revenues excluding TAC narrowly achieved company’s guidance and were flat at $1.04 billion, indicating that the company made headway in its core business at the cost acquiring traffic. Furthermore, non-GAAP operating income declined by 44% to $108 million. ^[2] Once again, Yahoo’s performance in the up and coming Mobile, Video, Native and Social (MVNS) ads vertical improved during the quarter. While GAAP MVNS revenues (including TAC) grew by 60% to $399 million, non-Maven revenues declined by 2.3% to $725 million. Additionally, mobile revenue grew by 54.6% to $252 million while PC ads revenue improved by 5.3% to $872 million.

While Yahoo’s core search ad revenues (excluding-TAC) declined by 2.9% to $415.25 million, its display ad revenues improved by 3.26% to $406.69 million in the quarter. The company reported growth in all search metrics such as the price per click (with 4% growth), as well as the click driven revenue and number of paid clicks (13% growth). Furthermore, display ads performance metrics—such as number of ads sold (9% increase) and price-per-ad (10% growth)—also improved. In this note, we will discuss the highlights of Yahoo’s earnings announcement.

See our complete analysis of Yahoo! here

Outlook For Third Quarter 2015

For the third quarter, Yahoo expects revenues (ex-TAC) to be in $1.00-$1.04 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. This guidance indicates that the company will continue to report a decline in the core business, 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. ^[3] In Q2, Yahoo’s mobile revenue was $252 million, up from $163 million in Q2 2014, an increase of 54.6% year over year. Furthermore, Yahoo continued to report growth in its total mobile unique visitors, which grew to over 600 million in the quarter. ^[4] Additionally, mobile now contributes 22% of our traffic-driven revenue. 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.

During the earnings call, Yahoo announced that it was aggressively pursuing the mobile search space as users continue to search online when they are on the move through their mobile phones. Furthermore, Yahoo continues to explore opportunities to monetize its mobile base by adding more functionality for its Gemini mobile platform. In Q2, Yahoo launched its new mobile search on the majority of its U.S. mobile search traffic. Accordingly, it has announced investment outlay for mobiles in Q3.

Display Ads Revenue Grows

The display ads division makes up 5.6% of Yahoo’s estimated value. In Q2, the display ad revenues (excluding traffic acquisition cost) grew by 3.26% year over year to $406.69 million. While the number of display ads sold across Yahoo properties rose by 9%, due to assimilation of BrightRoll, the price per ad improved by 10%, driven by increases in both native and premium ads as well as an improved mix of video inventory. Additionally, Yahoo has stated that MVNS ads, having grown by 60% year over year, are expected to boost display revenue in the future and offset the decline in revenues from desktop display ads. 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 7.3% 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 2.9% $415 million. While the company reported 13% growth in the number of paid clicks, price per click improved by 4%, indicating the relevancy and improvement in Yahoo’s content as users used Yahoo for their search queries. However, the low growth of price per click indicates that monetization rate remains low and advertisers continue to limit their ad spending across Yahoo sites. Furthermore,  revenue growth again eluded company as the product mix indicated more ads sales on mobile devices, which have a lower cost per click compared to PC ads. However, as stated earlier, the company continues to focus on rolling out new search products on mobile to leverage its growing base of mobile users and the increasing ad spend on search ads.

Update On Investments

Yahoo stated that it was on course to spinoff Alibaba stake into a separate entity by the end of this year. The company has recently filed a registration statement on form N-2 with the SEC in connection with its plan to spin-off remaining shares in Alibaba.  It plans the spin-off of an independent publicly-traded investment company called Ababacoa , which is to hold the Alibaba shares, along  with Yahoo! Small Business.

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. The company said that it continues to witness momentum in Tumblr and mobile monthly active users increased by 36% since Q2 of last year, and overall Tumblr mobile usage is up nearly 70% year on year. Assimilation of BrightRoll and Flurry platform into Gemini market place continues and is expected to yield higher revenues in the future. The Flurry network has enabled Yahoo to drive native mobile ad growth through its mobile developer suite that was launched in first quarter. Due to Yahoo! mobile developers suite, more than 225,000 developers and their 700,000 apps are reaching 1.8 billion devices. 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 $43.99 price estimate for Yahoo!, which is 10% above the current market price.

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1. Yahoo Reports Second Quarter 2015 Results, July 21 2015, www.yahoo.com [↩]
2. 8-K, SEC [↩]
3. See Yahoo Earnings Preview: Will Shift To Mobile Boost Revenues In Q2? [↩]
4. Earnings Transcript Q2 2015 [↩]