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Yahoo's 2Q Earnings Miss, Sale Plans On Track

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Yahoo’s second-quarter revenue was more or less in line with estimates but its earnings disappointed. Shares barely moved as investors are actually looking forward to a possible sale of the company rather than its earnings results.

 

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CEO Marissa Mayer updated the investment community on the focus areas, which are Search, Mail and Tumblr, and four core verticals (news, sports, finance and lifestyles) in priority markets (the U.S., Canada, the U.K., Germany, Hong Kong and Taiwan). For advertisers, the company continues to focus on Gemini and BrightRoll.

Mavens revenue spiked in the last quarter. After decelerating and even declining revenues in the preceding five quarters, strong double-digit growth returned in the last quarter.

Engagement with the Tumblr app on mobile continues to increase with management saying that close to 90% of Yahoo’s daily active users were now engaging with it on mobile devices in addition to desktops. Gemini mobile ad formats are coming to Tumblr and expectatiosna re high that they will monetize well.

Mayer expressed satisfaction that the headcount was back to 2005 levels, i.e. down 45% since she took over in 2012 and now stood at 8.8K plus 700 contractors.

Sale plans remain on track.

The numbers in detail-

Revenue

Yahoo reported GAAP revenue of $1.31 billion, which was up 20.3% sequentially and 5.2% year over year. Traffic acquisition cost (TAC) was up 104.8% sequentially and 134.5% from last year. Excluding these costs in all periods, net revenue was down 2.1% sequentially and 19.5% year over year, exceeding the Zacks Consensus Estimate by 0.7%.

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

Search revenue (ex-TAC) was down 8.2% sequentially and 23.1% year over year. Key metrics were a huge disappointment in the last quarter, with paid clicks dropping 24% year over year. Management said that the company continued to maintain good relations with Microsoft (MSFT - Free Report) , Alphabet (GOOGL - Free Report) , Apple (AAPL - Free Report) and Mozilla. Mayer also said that if Mozilla chose to opt out of the relationship, there were ways to mitigate the loss to Yahoo. The price per click (PPC) grew 8%.

Display revenues (ex-TAC) grew 4.2% sequentially but were down 2.7% from the comparable quarter of 2015. The number of ads sold grew 9% from the year-ago quarter with the price per ad (PPA) dropping 15%. The increased volumes were attributed to increased property supply, especially in core verticals sold through programmatic channels and continued growth in the native syndication business. The weaker pricing was attributed to the ongoing mix shift to the programmatic model.

Mavens (mobile, video, native, social) grew 29.2% sequentially and 26.3% from a year ago reversing the trend of continually decelerating year-over-year revenue growth.

Mobile growth is extremely important because of the increasing use of mobile devices to connect to the Internet. Management recently started breaking out traffic-driven mobile revenue, which came to $414 million in the last quarter, of which Yahoo paid out $155 million to its revenue sharing partners. Net mobile revenue was flat sequentially and up 2.8% year over year.

Other (fees, listings and leads) revenues were down 4.3% sequentially and 43.3% from last year.

Display, Search and Other platforms represented 47%, 38% and 15% of Yahoo’s second-quarter ex-TAC revenue, respectively.

By geography: Yahoo generated around 76% of revenue on an ex-TAC basis from the Americas (down 2.3% sequentially and 20.9% from Jun 2015), around 7% came from the EMEA region (down 5.6% sequentially and 16.6% year over year) and the balance from the Asia/Pacific (flat sequentially and down 12.8% year over year).

Margins

Yahoo generated a gross margin of 43.8% in the last quarter, down 926 bps sequentially and 1,630 bps year over year.

Total operating expenses of $680.8 million were down 5.6% sequentially and 1.1% from the year-ago quarter. All except cost of revenue declined sequentially and year over year as a percentage of sales. Cost of revenue increases were impacted by the change in revenue presentation, as a result of the amendment to the Microsoft search agreement. So TAC is now being shown entirely as cost of revenue instead of as a reduction from revenue.

The net result was an operating margin of -8.3% that was worse than the previous quarter’s -10.3% but down from the year-ago quarter’s -1.4%.

Net Income

Yahoo’s pro forma net loss was $56.8 million or 4.3% of sales compared to loss of $18.4 million or 1.7% of sales in the previous quarter and loss of $980 million or 0.1% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring and other charges as well as goodwill impairment charges of $394.9 million and intangibles impairment charges of $87.3 million related to Tumblr.

Including the special items and the amount given out to non-controlling interests, Yahoo’s GAAP net loss was $439.9 million ($0.46 per share) compared to loss of $99.2 million ($0.10 per share) in the Mar 2015 quarter and net loss of $21.6 million ($0.02 per share) in the June quarter of last year.

Balance Sheet

Yahoo’s cash and short-term investments balance was $6.38 billion at quarter-end, up $404.4 million during the quarter. The company generated $409.9 million of cash from operations, of which $77.9 million was spent on capex.

Guidance

Yahoo provided limited guidance for the third quarter of 2016. Accordingly, revenue is expected to be down in line with normal seasonality to $1.275-1.325 billion, TAC $440 million, revenue on an ex-TAC basis $840-880 million, depreciation and amortization of $125 million and SBC of $130 million. Management did not provide guidance for adjusted EBITDA and operating income because of difficulties in predicting certain items. 

2016 estimates are as follows: Revenue of $4.900-5.100 billion, TAC of $1.500 billion, depreciation and amortization of $525 million and SBC of $500 million.

Recommendation

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

 

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