Yahoo Earnings Preview: Mobile To Boost Revenue Once Again.

Yahoo! (NASDAQ:YHOO) is set to report its third-quarter results on Tuesday, October 20th. ^[1] The stock continues to under-perform the market and the stock has declined by over 15% in last three months, while the return on NASDAQ composite index is close to -6%. The primary reason for this under-performance has been Yahoo’s core business, which has failed to deliver the necessary traction in revenues from the online ads industry. The company is aggressively targeting mobile devices for display (video), social and native ads to boost its organic revenues. However, we believe that the company will continue to report little or no improvement in revenue growth due to secular decline in its desktop business.  In this earnings announcement, we will 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, we continue to monitor Yahoo’s plan to spinoff Alibaba’s stake into a wholly owned subsidiary.

See our complete analysis of Yahoo! here

Outlook For Second 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 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 Q2. ^[2] 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 Q2, Yahoo’s mobile revenue was $252 million, up from $163 million in Q2 2014, an increase of 54.6% year over year.  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).

Display Ads Under Scanner

The display ads division makes up 6.1% of Yahoo’s estimated value. In Q2, revenues grew by 3.3% year over year to $407 million. While the number of display ads sold across Yahoo properties rose by 9%, largely due to assimilation of BrightRoll, the price per ad improved by 10% due to the favorable shift in mix of premium ads, especially video, to low cost ads. 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. 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 Q3 as well. As a result, we expect revenue per impression to remain flat in the future.

Search Ads To Improve

Search ads make up 4.6% of Yahoo’s estimated value. In Q2, search ad revenues (ex-TAC) declined by to 2.9% $415 million, despite its contract with Mozilla that boosted its gross search revenues (including TAC). 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. Revenue growth eluded company as the product mix indicated more ads sales on mobile devices, which have a lower cost per click compared to PC ads. We believe the trend continued in Q3 and that the monetization rate remained low as advertisers continue to limit their ad spending across Yahoo sites.

Update On Spinoff

The IRS declined to provide the PLR (private letter ruling) for the intended spinoff , though it indicated that it had not concluded the transaction would be taxable. ^[3] Yahoo did not comment beyond what the company said in its filing with the US Securities and Exchange Commission. We expect the company to shed some more light on this matter during the earnings announcement on 20^th October.

We currently have a $42.58 price estimate for Yahoo!, which is 27% above the current market price.

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1. Earnings Announcement For Q3 [↩]
2. Earnings Transcript Q2 2015 [↩]
3. Read With Alibaba SpinOff In Tailspin, What Are The Possibilities For Yahoo?) However, Yahoo has gone ahead with its plans. ((Yahoo to go ahead with Alibaba spinoff without IRS approval, September 28 2015 [↩]