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Yahoo Core Recovering, To Distribute 50% of Alibaba Proceeds

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Yahoo’s second-quarter earnings excluding restructuring charges and including SBC and gains from patent sales came in at 30 cents, which was down both sequentially and year over year and in line with the Zacks Consensus Estimate. The results were helped by a lower share count.


Yahoo reported GAAP revenue of $1.08 billion, which was down 4.3% sequentially and 4.5% year over year. Traffic acquisition cost (TAC) was down 4.5% sequentially and 31.9% from last year. Excluding these costs in all periods, net revenue was down 4.3% sequentially and 2.9% year over year.

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

Display revenues (ex-TAC) were down 3.7% sequentially and 6.9% from the comparable quarter of 2013. The number of ads sold increased 24% from last year but were offset by a 24% decline in the price per ad. Yahoo’s streaming ads, which doubled sequentially to about 40% of total display volume, are helping the company generate stronger revenue, although the lower prices are impacting the ASP. The premium strategy remains a work-in-progress. Display revenue for mobile remains a positive, doubling year over year for the second straight quarter.

Search (ex-TAC) was down 3.7% sequentially and up 6.0% year over year. Paid clicks grew around 3% year over year, while the price per click jumped 15%. This was despite the fact that the Microsoft (MSFT - Free Report) RPS guarantee expired in March. A lot of the strength in search is attributable to improvement in click yields, due to relative strength in the Americas region and on Yahoo properties (rather than partner sites) both of which typically yield more revenue.  Improved ad formats, strategic partnerships and better user experience continued to drive click-through rates.  

Other (fees, listings and leads) revenues were down 6.4% sequentially and 10.5% from last year. In the last quarter, Yahoo entered into a patent licensing agreement that will yield $20 million a quarter for four years and a smaller amount in the fifth year.

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

Yahoo generated around 75% of revenue on an ex-TAC basis from the Americas (down 6.9% sequentially and 2.0% from Jun 2013), around 8% came from the EMEA region (up 6.4% sequentially and 1.9% year over year) and the balance from the Asia/Pacific (up 3.4% sequentially and down 8.3% year over year).


Yahoo generated a gross margin of 70.9% in the last quarter, down 21 bps sequentially and up 51 bps year over year.

Total operating expenses of $739.7 million were down 3.5% from the previous quarter and up 12.2% from the year-ago quarter. Product development cost increased sequentially as a percentage of sales, partially offset by a decline in S&M cost. Both were significantly higher than in the year-ago quarter.

The net result was an operating margin of 2.7% that shrank 78 bps sequentially and 965 bps from the year-ago quarter.

Net Income

Yahoo’s pro forma net income was $261.6 million or 24.1% of sales compared to $321.1 million or 28.3% of sales in the previous quarter and $337.7 million or 29.8% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring charges and gains on sales of patents on a tax-adjusted basis in the last quarter.

Including the special items and the amount given out to non-controlling interests, Yahoo’s GAAP net income was $269.7 million ($0.27 per share) compared to $311.6 million ($0.30 per share) in the Mar 2014 quarter and net income of $331.2 million ($0.30 per share) in the Jun quarter of last year.

Balance Sheet

Yahoo has a solid balance sheet, with cash and short term investments of $2.74 billion, which dropped $195.1 million during the quarter. The company generated $357.4 million from operations in the last quarter, spending $107.4 million on capex and $718.6 million on share repurchases in the last quarter.


Yahoo provided limited guidance for the third quarter of 2014. Accordingly, revenue on a GAAP basis is expected to be $1.06-1.10 billion, revenue on an ex-TAC basis $1.02-1.06 billion, with adjusted EBITDA of $220-260 million and non GAAP operating income of $70-110 million. The tax rate going forward is expected to be around 37%. The results will exclude Alibaba’s contribution (as equity earnings) following their IPO.

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. Following the IPO, Alibaba will not be included in this section, which will negatively impact its results, particularly since the Yahoo Japan portion is nowhere near as strong. On a positive note, Yahoo will be selling less than the 40% it had previously agreed upon. Management intends to distribute 50% of the proceeds, retaining the rest for operational flexibility and leaving room for further acquisitions if required.

Mayer offered hope that the display business would recover, as new products (Yahoo Ad Manager Plus) deals with the programmatic buying trend. Premium plans are also on track with the company investing heavily in quality content to attract traffic and premium ad rates. The search business is already looking good and here again new products have made a difference. Yahoo is making good progress on the mobile platform

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

Yahoo shares currently have a Zacks Rank #3 (Hold). Better-ranked technology stocks that are worth considering at this time include Intel Corp (INTC - Free Report) and SanDisk Corp , both of which have a Zacks Rank #1 (Strong Buy).

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