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Yahoo Turnaround Remains On Track

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Yahoo reported second-quarter non-GAAP earnings that were down 11.6% sequentially and up 14.8% year-over-year, exceeding the Zacks Consensus Estimate by 5 cents, or 16.1%. Earnings were driven by Yahoo’s equity holdings in Alibaba and Yahoo Japan.

The surprise history is also positive (33.8% in the four preceding quarters).

Yahoo shares dropped 1.7% during the day, but made up half the loss in after-hours trading. It’s apparent that the company still has some way to go before investments and strategies start bearing fruit. In the interim, there is unlikely to be a dramatic change in Yahoo’s performance.


Yahoo reported GAAP revenue of $1.14 billion, which was down 0.4% sequentially and 6.8% year over year. Traffic acquisition cost (TAC) was down 10.8% sequentially and 53.1% from last year. Excluding these costs in all periods, net revenue was essentially flat (up 0.3% sequentially and down 0.9% year over year), short of the Zacks Consensus Estimate.

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

Display revenues (ex-TAC) were up 5.3% sequentially and down 10.6% from the comparable quarter of 2012. Yahoo’s Display initiatives appear to be on the right track, since the rate of decline in the number of ads sold (excluding Korea which Yahoo is shutting down) is going down.

Pricing remains negative due to lower premium ads sold, made worse by the weaker pricing in the non-guaranteed category. There is a significantly negative trend in pricing over the last four quarters, which management promised to address with better ad inventory and better mix.

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 and Facebook (FB - Free Report) .

Search (ex-TAC) was down 1.3% sequentially and up 4.6% year over year. Excluding the contribution from Korea in the year-ago quarter, revenue would be up 8%. Ad quality improvements, better user experience and new ad products continued to drive click-through rates.

The number of paid clicks jumped 21% from last year, the fifth straight quarter that growth has accelerated. However, the price per click dropped 8%, which Yahoo attributed to a continued mix shift to international markets.  

Other (fees, listings and leads) revenues were down 5.1% sequentially and up 10.2% from last year.

Display, Search and Other platforms represented 40%, 38% and 23% of Yahoo’s first quarter revenue, respectively. This was the last quarter of year-over-year benefit related to the Alibaba TIPLA payments.

Yahoo generated around 74% of revenue on an ex-TAC basis from the Americas (down 1.6% sequentially and up 2.0% from Jun 2012), around 8% came from the EMEA region (up 3.3% sequentially and down 8.4% year over year) and the balance from the Asia/Pacific (up 3.8% sequentially and down 8.3% year over year).


Yahoo generated a gross margin of 70.4% in the last quarter, up 61 bps sequentially and 456 bps year over year.

Total operating expenses of $659.1 million were up 6.8% from the previous quarter and up 6.6% from the year-ago quarter. While all expenses increased sequentially as a percentage of sales, S&M increased the most, followed by product development with G&A relatively flat. Both product development and S&M increased significantly from the year-ago quarter.

The net result was an operating margin of 12.4% that shrank 331 bps sequentially and 272 bps from the year-ago quarter.

Net Income

Yahoo’s pro forma net income was $337.7 million or 29.8% of sales compared to $386.8 million or 33.9% of sales in the previous quarter and $328.4 million or 27.0% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring charges in the last quarter.

Including the special item and the amount given out to non-controlling interests, Yahoo’s GAAP net income was $331.2 million ($0.30 per share) compared to $389.8 million ($0.35 per share) in the Mar 2013 quarter and net income of $226.6 million ($0.19 per share) in the Jun quarter of last year.

Balance Sheet

Yahoo has a solid balance sheet, with cash and short-term investments of $2.6 billion, which was, however, down $384.3 million during the quarter. The company generated $330.8 million from operations in the last quarter, spending $82.1 million on capex, $1.01 billion on acquisitions including Tumblr and $652.8 million on share repurchases in the last quarter ($1.9 billion remains under the current authorization). It also redeemed its preference shares in Alibaba for $800 million plus $46 million in related dividends. Yahoo does not have any debt.


Yahoo provided limited guidance for the second quarter of 2013 and updated its guidance for the full year. Accordingly revenue for the current quarter is expected to be $1.12-1.17 billion, with adjusted EBITDA of $330-350 million and operating income of $165-185 million.

For the full year, Yahoo expects revenue of $4.45-4.55 billion (reiterated), with EBITDA of $1.55-1.65 billion (reiterated) and operating income of $900 million to 1.00 billion (down from $1.05-1.10 billion).

To Conclude

While Yahoo’s second-quarter performance was driven by its equity holdings with the core business remaining weak, management commentary was encouraging. After a tumultuous few years, the company appears to be headed in the right direction.

CEO Marissa Mayer said that Yahoo is currently focused on getting the right people on board, which would result in properly focused products, leading to stronger traffic and thereby, revenue. The company is, of course, helping the traffic aspect with acquisitions like Tumblr, which is not expected to generate meaningful revenues this year.

However, Yahoo expects to implement cross platform integration on several fronts, which is expected to enhance both the Yahoo and Tumblr experiences. Acquisitions will continue moving forward, with the focus shifting somewhat to shoring up its video capabilities.

Mayer justified the large number of acquisitions in mobile by saying that Yahoo was under-invested in the area. She has now grown the team 6X, which has generated 340 million monthly mobile subscribers. Recently, at its Analyst Day, Yahoo said that new product versions and re-designs resulted in Yahoo Mail daily average users (DAUs) growing 70%, Flickr usage growing 4X and user interaction on the home page increasing 25%. Therefore, it appears that the company’s people-product-traffic-revenue plan is on track.

Yahoo shares have appreciated 33.5% over the last six months, after the Alibaba issue was resolved, the company started retreating from unprofitable markets and acquiring companies to build its position in mobile.

Yahoo shares currently have a Zacks Rank #1 (Strong Buy), even better than SanDisk , which is also turning around and currently carries a Zacks Rank #2 (Buy).

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