Yahoo’s (YHOO) fourth-quarter adjusted earnings of 20 cents topped the Zacks Consensus Estimate of 19 cents, but the 6.7% increase in share prices was because it also announced the tax free spin-off of 100% of Yahoo’s Alibaba (BABA) holdings.
Revenue
Yahoo reported GAAP revenue of $1.25 billion, which was up 9.1% sequentially and down 1.0% year over year. Traffic acquisition cost (TAC) was up 30.8% sequentially and 8.0% from last year. Excluding these costs in all periods, net revenue was up 8.1% sequentially while declining 1.5% year over year.
Yahoo combines revenue from O&O and affiliate sites and presents under Display and Search categories. The search business showed signs of recovery as promised while the Display side continued to struggle.
Display revenues (ex-TAC) were up 0.8% sequentially and down 18.6% from the comparable quarter of 2014. Key metrics changed somewhat in the last quarter, with the number of ads sold declining from 24% to 17% even as the price declines moderated from 24% to 20%. The secular decline on the PC platform continues to impact segment sales and is being gradually offset by stronger sales in mobile.
Management has made significant investments in programmatic advertising through Yahoo Ad Manager Plus and increased efforts to improve engagement. Yahoo Magazines and Yahoo Live are helping on this front with the company winning big advertisers like Gucci, Mars, Toyota, Visa, Volkswagen and Citibank.
Search (ex-TAC) was up 17.7% sequentially and up 14.8% year over year. Key metrics were very positive in the last quarter, with paid clicks growing from 0% to 10% compared with the year-ago quarter partially offset by the price per click dropping from 17% to 7%. Improvement in click yields continues, due to relative strength in the Americas region and on Yahoo properties (rather than partner sites) both of which typically yield more revenue.
Mobile growth is impacting pricing at both segments. But growth on the platform is extremely important because of the increasing use of mobile devices to connect to the Internet. Management started breaking out mobile revenue in the last quarter, as mobile generated $412.6 million, of which Yahoo paid out $158.8 million to its revenue sharing partners. Net mobile revenue grew 23% sequentially.
Other (fees, listings and leads) revenues were up 2.1% sequentially and 2.0% from last year. In the Jun 2014 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 34%, 45% and 21% of Yahoo’s third-quarter revenue, respectively.
Yahoo generated around 77% of revenue on an ex-TAC basis from the Americas (up 9.9% sequentially and 0.1% from Dec 2013), around 7% came from the EMEA region (up 7.2% sequentially and down 7.3% year over year) and the balance from the Asia/Pacific (down 1.2% sequentially and 7.4% year over year).
Margins
Yahoo generated a gross margin of 73.2% in the last quarter, up 118 bps sequentially and 4 bps year over year.
Total operating expenses of $799.1 million were up 2.7% from the previous quarter and 17.4% from the year-ago quarter. G&A increased sequentially as a percentage of sales, but was offset by more substantial declines in product development and S&M. Product development and G&A did however increase substantially from last year offsetting the decline in S&M.
The net result was an operating margin of 9.4% that expanded 515 bps sequentially and shrank 996 bps from the year-ago quarter.
Net Income
Yahoo’s pro forma net income was $192.3 million or 15.3% of sales compared to $397.9 million or 34.7% of sales in the previous quarter and $412.8 million or 32.6% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring charges, goodwill impairments and gain 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 $166.3 million ($0.17 per share) compared to $6.77 billion ($6.72 per share) in the Sep 2014 quarter and net income of $348.2 million ($0.34 per share) in the Dec quarter of last year. The Sep quarter of 2014 included gains from the sale of Alibaba shares.
Balance Sheet
Yahoo’s cash and short-term investments balance dropped to $7.99 billion, down 3.20 billion during the quarter. The company generated $111.0 million from operations in the last quarter, spending $67.9 million on capex, $545.2 million on acquisitions and $1.61 billion to repurchase shares in the last quarter.
Guidance
Yahoo provided limited guidance for the first quarter of 2015. Accordingly, revenue on a GAAP basis is expected to be $1.11-1.15 billion, revenue on an ex-TAC basis $1.02-1.06 billion, with EBITDA of $200-240 million and non-GAAP operating income (excluding SBC of $110-120 million) of $50-90 million.
Our Take
Management’s decision to spin off the Alibaba business is the main takeaway from Yahoo’s fourth-quarter earnings announcement. This tax-free distribution will generate liquidity for investors and also streamline core operations for better management focus.
The broader trends (or turnaround if you will) continued in the last quarter and management is delivering on its promises. But Yahoo does have a difficult market to navigate through and that hasn’t got any easier.
Yahoo was the leader in the traditional PC display ad market, so the secular decline here due to the advent of mobile had a rather significant impact on the company. But it now appears that the company is well on track to reinvent itself with its Gemini platform. This is basically a business wherein Yahoo makes mobile apps which are monetized through native ads. Management said that native ads on Gemini grew 32% sequentially. Moreover, native ads increased on both mobile and desktop platforms, which could bring some stability to the latter.
The search business also continues on the road to recovery and the focus on building a more profitable business is commendable. Volumes increased as prices declined in the last quarter. Last quarter, Yahoo compared favorably with Google (GOOGL) on pricing although Google ran away with the volumes. This will be an interesting thing to watch when Google reports later this week.
So Mayer’s people-product-traffic-revenue strategy appears to be paying off. The growth pillars now in focus are search, communications, digital magazines and video, where most of its ongoing investment is likely to be focused.
Despite the solid results, Yahoo shares currently carry a Zacks Rank #4 (Sell), so investors may want to look at other technology stocks like IAC Interactive (IACI), which carries a Zacks Rank #1 (Strong Buy). Alibaba and Groupon (GRPN) are also attractive at the moment, both carrying a Zacks Rank #2 (Buy).
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