Yahoo Earnings Preview: With One Eye On Results, Investors Seek a Way Forward

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Yahoo! (NASDAQ:YHOO) is set to report its fourth-quarter results on Tuesday, February 2nd . [1] The stock continues to under-perform the market, having declined by over 12% over last three months. In contrast, the NASDAQ composite index is down a less painful 8%. The primary reason for this under-performance has been Yahoo’s stalled plans to spin off its Alibaba stake to shareholders, which it fears it cannot do on a tax free basis.  Accordingly attention has turned to the core business, which has failed to generate sufficient revenue from its online ads business. As a result, the market is rife with rumors that the company plans to sell its internet business, as activist investors wish. [2] We believe that the company will continue to report little or no improvement in revenue growth due to a secular decline in its desktop business and inability to monetize its mobile platform.  Therefore, 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. In sum, we (as most observers) look to management to articulate strategics moves out of the present conundrum.

See our complete analysis of Yahoo! here

Outlook For Fourth Quarter 2015

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For the fourth quarter, Yahoo guided revenues (ex-TAC) to be in $920-$960 million range. Additionally, it expected 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 content to achieve better growth in 2016.

Mobile Audience To Boost Ad Served and Revenues

As we have noted, Yahoo’s display ads and search ads divisions make up 5.4% and 7.2% 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, and advertisers allocating less of their budget for Yahoo’s properties . To address this issue, Yahoo is aggressively targeting mobile devices, and has been able to grow  its mobile user base to approximately 600 million unique visitors in Q3. [3]

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. 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 5.4% of Yahoo’s estimated value. In Q3, revenues by grew by 2.14% year over year to $404.89 million. While the number of display ads sold across Yahoo properties rose by 8%, largely due to assimilation of BrightRoll, the price per ad improved by 8% due to the favorable shift in mix of premium ads, especially video, to low cost ads. Yahoo has stated that MaVeNS 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 Q4 as well. As a result, we expect revenue per impression to remain flat in the future.

Search Ads To Improve

Search ads make up 7.2% of Yahoo’s estimated value. In Q3, search ad revenues (ex-TAC) declined by to 5% $693 million, despite its contract with Mozilla that boosted its gross search revenues (including TAC). During Q3 earnings announcement, the company announced that it signed a three-year partnership with Google to bolster search capabilities. However, since revenue growth continues to elude the company, we want to know whether the said contract helped the company to improve the number of paid clicks, price-per-click (revenue per search) in Q4.

Update On Planned Sale Of Internet Business

Yahoo! Inc.( NASDAQ:YHOO) is said to be considering the outright sale of its internet business, instead of spinning it off into a separate entity as put forward last month. [4] We expect the company to shed some more light on this matter during the earnings announcement on 26th January.

We currently have a $35.86 price estimate for Yahoo!, which is 20% above the current market price.

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Notes:
  1. Earnings Announcement For Q3 []
  2. Read Yahoo Considers Selling Its Internet Business, January 11 2016 []
  3. Earnings Transcript Q3 2015 []
  4. Yahoo to Reconsider Sale of Web Business Instead of Spinoff, January 8 2016 []