Yahoo Earnings: Plans To Turnaround Announced Even As Core Revenue Declines

Yahoo! (NASDAQ:YHOO) reported its fourth-quarter earnings Tuesday, February 2nd . ^[1] The company’s core advertising revenues (including Traffic Acquisition Cost or TAC) improved by 2% year on year to $1.273 billion. However, revenues excluding TAC narrowly achieved company’s guidance and declined by 15% to $1.002 billion, indicating that the company failed to make meaningful headway in its core business. Furthermore, its adjusted EBITDA declined by 48% to $215 million. Nevertheless, Yahoo continued to report improvement in performance in the up and coming Mobile, Video, Native and Social (MVNS, or more commonly MaVeNS) ads vertical during the quarter. While GAAP MVNS revenues (including TAC) grew by 26% to $472 million, non-Maven (i.e., MVNS) revenues were flat at $750 million. Additionally, mobile revenue grew by 15% to $291 million, while PC ads revenue improved by 6.7% to $931 million.

Yahoo’s core search ad revenues (excluding-TAC) declined by 17.5% to $381.27 million, while its display ad revenues improved marginally by 1.6% to $471..67 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 (6% growth). However, search ads performance metrics was a mixed bag with a 10% year-over-year decrease in number of ads sold and 3% increase in price per click. ^[2]

Considering the anemic performance of  the company over the past few year, CEO Marissa Mayer announced plans to turn the company around. In this note, we explore the plan in detail.

See our complete analysis of Yahoo! here

Outlook For 2016

In Q1 2016, Yahoo has guided that its revenues would be in $1.05-1.09 billion range, while adjusted EBITDA will be in $100-$120 million range. For the 2016, Yahoo expects revenues (ex-TAC) to be in $4.4-$4.6 billion range. Additionally, it expects adjusted EBITDA to be between $700 million and $800 million, and non-GAAP operating income to be between $150 million and $250 million. The company stressed that it plans to narrow its strategy and focus on fewer products with higher quality to achieve better growth in 2016. As a result, it will exit certain businesses and shut down legacy  display ads that will negatively impact its revenues by $275 million.  Other trends, such as shift of search platform and TIPLA (Technology and Intellectual Property Licensing Agreement) revenue run off, will setback revenues by $400 million. However, the Mavens focus  will boost 2016 revenues by $200 million.

Plan to Turnaround The Company

In this earnings announcement, the management unveiled its plans to turnaround the company. While it expects that revenues will decline in 2016, it hopes that the company will return to growth over 2017-2020 period. The plan is as follows:

1. Narrow Focus On Core Products To Improve User Engagement: Yahoo has a user base of over a billion monthly active users. It plans to focus on three consumer platforms (Search, Mail, and Tumblr) and four verticals (News, Sports, Finance and Lifestyle). And it will focus its efforts through these verticals in growth markets like the U.S., Canada, U.K., Germany, Hong Kong, and Taiwan. It is aggressively targeting mobile search for growing its search ads revenues, while looking to leverage its Tumblr user base to engage with them there as a social medium. For advertisers, Yahoo will focus on its two core offerings: Gemini and BrightRoll. Gemini combines search and native ads for superior results, while BrightRoll offers programmatic buying and selling tools for video, display and native advertising.
2. Mavens Revenue Growth In Focus: As its legacy ads business is in decline, Yahoo plans to invest in the Mavens strategy to counterbalance this decline. In 2015, Mavens revenue exceeded $1.6 billion in GAAP revenue, a 45% year-over-year increase. It hopes that by focusing on improving engagement and improving monetization for the core consumer products, together with the syndication of mobile tools through the Yahoo Mobile Developer Suite, it can drive long-term sustainable revenue of more than $1.8 billion in Mavens in 2016.
3. Simplify business and improve execution: Since 2012 the Company had invested across different product areas and markets to drive innovation and fuel growth. However, these initiatives have yielded mixed results. Therefore, the company plans to align its resources towards proven growth areas, including its mobile and programmatic platforms. Recently, the company closed Yahoo Screen and shifted away from original scripted content. In 2016, Yahoo plans to consolidate some digital magazines under one of the aforementioned four core verticals, while shutting down others. The company hopes that a simpler product portfolio more focused on Yahoo’s strengths will allow it to improve its offerings and increase profitability.
4. Reduce employee headcount to improve profitability: Since 2012, Yahoo has made significant strides to manage headcount and achieve stability with fewer employees. It has reduced its employee strength from 14,200 employees and 2,800 contractors, to 10,400 employees and 860 contractors at the end of 2015. During the time, it has also closed 22 offices. To that end, Yahoo plans to reduce its workforce by roughly 15% and exit five offices in Dubai, Mexico City, Buenos Aires, Madrid, and Milan. The Company anticipates having approximately 9,000 employees and fewer than 1,000 contractors. This represents a workforce that is roughly 42 percent smaller than it was in 2012 and will result in savings in short term operating expense of $400 million annually.

Update On Spinoff Plans

In December, the company announced that it was evaluating a reverse spin transaction, whereby Yahoo!’s operating business and equity holdings in Yahoo! Japan will be separated into a new operating entity. In addition to continuing the work on the reverse spin, the board will also consider other qualified strategic options.

We are in the process of updating our model. At present, we have a $35.86 price estimate for Yahoo!, which is 23% above the current market price.

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More Trefis Research

1. Yahoo Reports Third Quarter 2015 Results 8-K, February 2 2016, www.sec.gov [↩]
2. Yahoo investor presentation [↩]