Yahoo (YHOO) Stock Earnings Preview: Not Much to Hope For

Yahoo YHOO earnings are around the corner, and so is a possible sale of the company. So unlike other technology companies like Alphabet GOOGL, Microsoft MSFT, Intel INTC, or Cisco CSCO, Yahoo investors are equally interested in both outcomes.

Poor results at this stage are unlikely to affect the purchase price, with bids reportedly varying between $3 billion and 5 billion. Marissa Mayer’s compensation package and the induction of additional directors to Yahoo’s board serve as further proof that the sale negotiations are in full swing. With the business showing no signs of recovery, the sale of the company is the main reason shares are up over 13% year to date.

YAHOO! INC Price and EPS Surprise

YAHOO! INC Price and EPS Surprise | YAHOO! INC Quote

 

On to the Numbers  

Yahoo is expected to report second-quarter earnings on Jul 19 after the bell. The company has a Zacks Rank #3 (Hold) and Earnings ESP of 0.00, which makes surprise prediction difficult. Our proprietary model shows that a Rank #3 stock can generate a positive surprise when the Earnings ESP is positive although Zacks Rank #1 or #2 (Buy-rated stocks) are better. We generally don’t recommended Sell-rated stocks (Zacks Rank #4 or #5) going into the earnings season.

Yahoo’s Problems Aren’t Going Away

The primary problem is the continued weakness in display ad revenue. Yahoo was in pretty bad shape when Mayer took over around three years ago and revenues are actually lower than they were at the time. The Brightroll acquisition was to deal with the problem of programmatic ad buying that was pushing down premium inventory prices. Mayer folded in the analytics firm Flurry, Gemini native ads supply and Yahoo premium inventory to boost the effort, but the initiative has not performed as hoped. Consequently, display ad revenues have languished.

On the positive side, there is a significant difference in the quality of display revenues between then and now. Mayer has highlighted specific areas that she has focused on, i.e. the mobile, video, native and social areas that go by the Mavens name. This business has grown 60.2%, 43.1%, 25.9% and 7.4% year over year in the last four quarters, a rather significant rate of deceleration indicating that competition is perhaps too tough at the moment.

In March, eMarketer predicted that this year Yahoo’s display ad sales will decline 15.1% to less than 2% market share.

The search business looks worse. After three straight quarters of back-to-back declines and no clear growth strategy in sight, this business looks doomed to sink further. Pricing is perhaps a slight positive, although this doesn’t help much if volumes continue to decline. eMarketer expects search revenue to decline 12.7% to a 1.6% share of the market.

Mobile will remain a bright spot. Net mobile revenue grew 64.6% sequentially and 11.1% year over year in the last quarter and eMarketer expects its worldwide mobile ad business to grow 24.5% this year to $1.31 billion. The faster growth by competitors like Google and Facebook is however expected to lead Yahoo’s market share to shrink to 1.3% from 1.5% last year.

Hacking Off Underperforming Parts

The current strategy is to keep chopping off underperforming parts to somehow keep the system afloat. While this would further reduce overall revenue, there could be a positive impact on profitability.

Management didn’t revise 2016 guidance when the company reported first quarter results. The last we heard was (through statements to prospective buyers) that 2016 revenue would decline 15% and earnings over 20%. Further, the workforce would be cut by 1.5K to 9K. Total restructuring charges were expected to be $64-78 million, of which $40-48 million would be for severance and related cash expenditures.   

Going Forward

Pretty much as I said in the last quarter, all the bad news is out there now.  So the only thing that could perhaps move the shares meaningfully is some update on the sale plans that everyone is hankering for.

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