Yahoo Earnings Preview: Revenue Set To Decline As Slide In Ad Revenues Continues
Yahoo! (NASDAQ:YHOO) is set to report its first quarter results on Tuesday, April 18.  The company’s stock has outperformed the market in the last few months as the uncertainty surrounding its deal with Verizon for the sale of its core businesses subsided. The stock has increased by 11% in the last three months, compared a return on the NASDAQ composite index of close to 4%. However, Yahoo’s core business continues to suffer from low monetization rates and intense competition in the online ad and content industry. While the deal is now expected to close in the second quarter of 2017, we believe that the company will continue to report little or no improvement in revenue growth due to the secular decline in its online ad business. The company’s management said that it will not be holding an earnings call for its quarterly results as it closes its deal with Verizon. However, in this earnings announcement, we will be closely watching 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.
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Mobile Audience To Boost Ad Served and Revenues
Yahoo’s display ads and search ads divisions have struggled for substantial growth in revenues due to the stiff competition for ad dollars from companies such as Google. Furthermore, with an increase in user-generated content, its content is driving lower monetization rates. To address these issues, Yahoo is aggressively targeting mobile devices. As a result of past efforts, Yahoo’s mobile platform hit approximately 650 million unique visitors in 2016 and its properties have over a billion unique visitors every month.
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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. For 2016, the company reported that its mobile revenue grew by 42.6% year over year to $1.49 billion. 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 will be interested to see 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 around 5% of Yahoo’s value, according to our estimates. In Q4, display ad revenues (including traffic acquisition cost) declined by 5% year over year to $573 million. While the number of display ads sold across Yahoo properties grew by 4% ( largely due to the assimilation of BrightRoll), the price per ad declined by 10%. Yahoo has stated that MVNS ads, having grown by over 30% year over year in the previous 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 ad revenues in Q1 as well. As a result, we expect revenue per impression to decline in the future.
Search Ads To Improve
Search ads make up nearly 6% of Yahoo’s value, per our estimates. In Q4, despite an 18% improvement in price per click, its number of paid clicks (ad volume) declined by 21%. Furthermore, the product mix indicated more ad sales on mobile devices, which have a lower cost per click compared to PC ads. We believe that this trend continued in Q1, and we expect that the monetization rate remained low for Yahoo.
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- Yahoo Investor Site, April 13 2017 [↩]