Yahoo's Rides on Alibaba Highs

Yahoo (YHOO) reported first-quarter earnings that were down both sequentially and year over year, but slightly ahead of the Zacks Consensus Estimate of 29 cents. Shares responded to the strength in Alibaba, climbing 2.3% during the day and another 6.8% in extended trading.

Revenue

Yahoo reported GAAP revenue of $1.13 billion, which was down 10.5% sequentially and 0.7% year over year. Traffic acquisition cost (TAC) was down 30.0% sequentially and 36.4% from last year. Excluding these costs in all periods, net revenue was down 9.4% sequentially and up 1.7% year over year, exceeding our expectations by 1.0%.

Yahoo combines revenue from O&O and affiliate sites and presents under Display and Search categories.

Display revenues (ex-TAC) were down 16.7% sequentially and up 1.7% from the comparable quarter of 2013. Volumes more than doubled sequentially, while the decline in prices moderated. Yahoo’s streaming ads are helping the company generate stronger revenue, although the lower prices are impacting the ASP.

Display revenue for mobile doubled from the year-ago quarter with daily active users up 5X. The Americas region was the strongest with volumes increasing 18%. Management appears optimistic about the prospects of streaming ads, especially on the mobile platform. So pricing could improve in ensuing quarters.

Yahoo’s position in display will be a key to its future growth, since most market research firms are projecting strong growth here due to underlying drivers, such as brand building on online properties. However, Yahoo still has much to prove, given the growing success of rivals Google (GOOG) and Facebook (FB).

Search (ex-TAC) was down 3.7% sequentially and up 8.7% year over year. While paid click growth was a whole lot slower, the price per click was notably higher. Management stated the softness in paid clicks was particularly because of Asia and that the Americas region fared better. Search revenue for mobile doubled year over year.

Improved ad formats and better user experience continued to drive click-through rates. These comparisons exclude the effects the Microsoft (MSFT) guarantee.

Other (fees, listings and leads) revenues were down 5.7% sequentially and 9.2% from last year.

Display, Search and Other platforms represented 38%, 41% and 21% of Yahoo’s first-quarter revenue, respectively.

Yahoo generated around 77% of revenue on an ex-TAC basis from the Americas (down 8.7% sequentially and up 3.5% from Mar 2013), around 8% came from the EMEA region (down 12.1% sequentially and 1.1% year over year) and the balance from the Asia/Pacific (down 11.8% sequentially and down 7.9% year over year).

Margins

Yahoo generated a gross margin of 71.2% in the last quarter, down 203 bps sequentially and up 133 bps year over year.

Total operating expenses of $766.3 million were up 12.6% from the previous quarter and 24.1% from the year-ago quarter. All expenses increased sequentially as a percentage of sales, but product development and S&M were significantly higher than both the previous and year-ago quarters.

The net result was an operating margin of 3.5% that shrank 1,590 bps sequentially and 1,219 bps from the year-ago quarter.

Yahoo Inc - Quarterly Earnings Per Share | FindTheBest

Net Income

Yahoo’s pro forma net income was $321.1 million or 28.3% of sales compared to $412.8 million or 32.6% of sales in the previous quarter and $386.8 million or 33.9% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring charges on a tax-adjusted basis in the last quarter.

Including the special item and the amount given out to non-controlling interests, Yahoo’s GAAP net income was $311.6 million ($0.30 per share) compared to $348.2 million ($0.34 per share) in the Dec 2013 quarter and net income of $389.8 million ($0.35 per share) in the March quarter of last year.

Balance Sheet

Yahoo has a solid balance sheet, with cash and short term investments of $2.94 billion, which dropped $468.4 million during the quarter. The company generated $139.1 million from operations in the last quarter, spending $84.7 million on capex, $21.7 million on acquisitions and $449.6 million on share repurchases in the last quarter.

Guidance

Yahoo provided limited guidance for the first quarter of 2014. Accordingly, revenue on a GAAP basis is expected to be $1.12-1.16 billion, revenue on an ex-TAC basis $1.06-1.10 billion, with adjusted EBITDA of $290-330 million and non GAAP operating income of $130-170 million. The tax rate going forward is expected to be around 37%.

Our Take

Yahoo shares continue to be driven by strong other income, which comes from a 24% equity stake in Alibaba and a 35% stake in Yahoo Japan. Other revenue increased strong double-digits from the previous and year-ago quarters. Yahoo needs to sell 40% of its current holdings in Alibaba when it goes for an IPO, retaining the rest.

Mayer has her work cut out: she needs to get the core business in decent shape before the IPO and metrics are generally in positive territory. Once the IPO is over, the euphoria will die down and everyone will be focused on the core business. This is where there is a notable improvement in both ASP and volume, a trend that will hopefully gain momentum quarter to quarter.

Yahoo remains focused on getting the right people on board, which is resulting in properly focused products, leading to stronger traffic and thereby, revenue. The company is of course helping the process with suitable acquisitions, which may be expected to continue moving forward.

Firing and hiring at the company are things to watch keenly, since this could mean either weaker-than-expected performance or new direction in the business.

Yahoo shares currently have a Zacks Rank #3 (Hold).

Read the Full Research Report on YHOO
Read the Full Research Report on FB
Read the Full Research Report on MSFT


Zacks Investment Research