Yahoo Earnings: Mobile And Video Fillips Revenues

Yahoo! (NASDAQ:YHOO) reported its third-quarter earnings Tuesday, October 20^th. ^[1] The company’s core advertising revenues (including Traffic Acquisition Cost or TAC) improved by 7% year on year to $1.226 billion. However, revenues excluding TAC narrowly achieved company’s guidance and were flat at $1.003 billion, indicating that the company made headway in its core business at the cost of acquiring traffic. Yahoo continued to report improvement in performance in the up and coming Mobile, Video, Native and Social (MVNS) ads vertical during the quarter. While GAAP MVNS revenues (including TAC) grew by 43% to $422 million, non-Maven (i.e., MVNS) revenues declined by 4.7% to $693 million. Additionally, mobile revenue grew by 31% to $271 million, while PC ads revenue improved by 3.5% to $844 million. While Yahoo’s core search ad revenues (excluding-TAC) declined by 13.2% to $390.48 million, its display ad revenues improved by 2.14% to $404.89 million in the quarter. The company reported growth in all of its display ads performance metrics—such as number of ads sold (8% increase) and price-per-ad (8% growth).

On the spinoff front, the company said that its proposed spinoff (Aabaco) of its stake in Alibaba will be delayed to the first quarter of 2016. In this note, we will discuss the highlights of Yahoo’s earnings announcement.

See our complete analysis of Yahoo! here

Outlook For Fourth Quarter 2015

For the fourth quarter, Yahoo expects revenues (ex-TAC) to be in $920-$960 million range. Additionally, it expects adjusted EBITDA to be between $160 million and $210 million, and non-GAAP operating income to be between $10 million and $50 million. This guidance indicates that the company will continue to report a decline in the core business, despite numerous product refreshes. However, the company stressed that it plans to narrow its strategy and focus on fewer products with higher quality to achieve better growth in 2016.

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 Q3, Yahoo’s mobile revenue was $271 million, up from $207 million in Q3 2014, an increase of 31% year over year, and it now contributes at least 24% of Yahoo’s traffic-driven revenue. ^[3] Additionally, the company continues to report increases in mobile users, which were over 600 million during Q3. 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.

Furthermore, Yahoo continues to explore opportunities to monetize its mobile base by adding more functionality for its Gemini mobile platform. In Q3, Yahoo! App Publishing from its Mobile Developer Suite now makes up nearly 40% of the total mobile Gemini revenue and more than a quarter of the total Gemini (ads) supply. Also, it witnessed international supply increase by approximately 35% over last quarter as it deployed new ad units on Gemini internationally.

Display Ads Revenue Grows

In Q3, the display ad revenues (excluding traffic acquisition cost) grew by 2.14% year over year to $404.89 million. While the number of display ads sold across Yahoo properties rose by 8%, due to assimilation of BrightRoll, the price per ad improved by 8%, driven by increases in both native and an improved mix of video inventory. Additionally, Yahoo has stated that video ads are expected to boost display revenue in the future and offset the decline in revenues from desktop display ads. In Q3, its video GAAP revenue has more than doubled year over year and video Price-per-Ad is helping drive overall Price-per-Ad growth. We expect this trend to continue and expect revenue per impression to remain flat in the future.

Improvement In Ad Volume And Contract With Google In Focus

During the quarter, despite improvement in ad volume (5% growth), its price per click declined by 2% as shift to Gemini platform impacted revenue. The company reported that its search revenues (ex-TAC) declined by 5% to $693 million. However, the company continues to focus on rolling out new search products to leverage its growing base of users, content and the increasing ad spend on search ads. During the quarter, the company partnered with Trip Advisor to provide details on hotel ratings, reviews, and photos directly on the search page. It also introduced Gemini Product Listing Ads, giving sellers access to Yahoo!’s smartphone search inventory and ability to showcase their products. It also closed the loop between buyers and sellers through Click-to-Call ads that allows advertisers to add a call button to their native search ad.

The company announced that it signed a three-year partnership with Google to bolster search capabilities. This partnership will supplement its existing search agreement with Microsoft. However, the partnership with Google is non-exclusive and does not have minimum volume commitments. It covers both desktop and mobile traffic in the United States and many of its primary international markets.

We are in the process of updating our model. At present, we have a $43.99 price estimate for Yahoo!, which is 34% above the current market price.

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1. Yahoo Reports Third Quarter 2015 Results 8-K, October 20 2015, www.sec.gov [↩]
2. See Yahoo Earnings Preview: Yahoo Earnings Preview: Mobile To Boost Revenue Once Again [↩]
3. Earnings Transcript Q3 2015 [↩]