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Yahoo's Rides on Alibaba Highs

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Yahoo 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.


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 - Free Report) .

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 - Free Report) 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).


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.


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