Yahoo’s YHOO third-quarter adjusted numbers missed the Zacks Consensus Estimate, so it’s not surprising that shares were down 1.3% following the announcement.
The last quarter was one of those management will want behind them because revenue growth slowed materially and the best that they could come up with is a decision to leave some search revenue on the table because the price didn’t justify the quality (plus Gemini enhancements).
Yahoo entered into two big search agreements in the last quarter. The first is a non-exclusive deal with Alphabet GOOGL but will be effective only after regulatory approval. The second is with TripAdvisor TRIP for travel-related searches. The agreement with Microsoft MSFT was modified earlier this year and remains in place.
There seems to be no letup in the people-products-traffic-revenue actions so new hires, acquisitions, etc continue as usual despite the lingering uncertainty about the Alibaba (BABA) asset distribution as a tax-free transaction.
The turnaround seems greatly dependent on an intense focus on the right people. Mayer said that headcount was down 14% from last year and 32% during her tenure. Focus has now shifted to engineering and sales.
Next up is Mavens (mobile-video-native-social) that management has been holding out to us as its primary focus area. In the last quarter, this business grew 43.0% compared to 60.2% year-over-year growth in June, a pretty steep deceleration. Mobile revenue is likely to blame, since growth decelerated from 22% in the previous quarter to 7% just recently reported. Video revenue doubled, Gemini native ads grew 90% and 81% of Tumblr daily active users is now on mobile devices.
Yahoo maintained that it had a billion users across the world, 600 million of which were using its services on mobile devices.
Revenue
Yahoo reported GAAP revenue of $1.23 billion, which was down 1.4% sequentially and up 6.8% year over year. Traffic acquisition cost (TAC) was up 11.7% sequentially and 310.1% from last year. Excluding these costs in all periods, net revenue was down 3.9% sequentially and 8.3% year over year, missing the Zacks Consensus Estimate by 2.3%.
Yahoo combines revenue from O&O and affiliate sites and presents under Search and Display categories.
Search revenue (ex-TAC) was down 6.0% sequentially and 13.2% year over year. Key metrics were a huge disappointment in the last quarter, with paid clicks growing a mere 5% year over year, the lowest level in the last four quarters. While the quarter is seasonally weak, it’s notable that for the first time in over two years, Yahoo saw a decline (2%) in the price per click. Management attributed this to Gemini-driven investments that are seen in this line as well as Yahoo’s decision to forego some high-priced inventory that didn’t meet desired quality standards.
Display revenues (ex-TAC) were down 0.4% sequentially and up 2.1% from the comparable quarter of 2014. The number of ads sold grew 8% from the year-ago quarter (it was up 9% in the Jun quarter). Pricing also disappointed, growing 8% in the last quarter after the 10% growth in June.
MVNS (mobile, video, native, social) grew 43.0%, and the Flurry and Brightroll acquisitions appear to be paying off.
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 $424 million in the last quarter, of which Yahoo paid out $153 million to its revenue sharing partners. Net mobile revenue grew more than 7% sequentially and over 30% year over year.
Other (fees, listings and leads) revenues were down 6.5% sequentially and 16.1% from last year.
Search, Display and Other platforms represented 40%, 39% and 21% of Yahoo’s second-quarter ex-TAC revenue, respectively. All segments did worse than normal seasonality.
Yahoo generated around 78% of revenue on an ex-TAC basis from the Americas (down 3.2% sequentially and 5.4% from Sep 2015), around 7% came from the EMEA region (down 8.2% sequentially and 17.5% year over year) and the balance from the Asia/Pacific (down 5.5% sequentially and 17.6% year over year).
Margins
Yahoo generated a gross margin of 57.1% in the last quarter, down 301 bps sequentially and 1,496 bps year over year.
Total operating expenses of $718.2 million were down 6.0% sequentially and 7.7% from the year-ago quarter. Product development was down sequentially and year over year as a percentage of sales but S&M and G&A increased sequentially.
The net result was an operating margin of -1.5% that was worse than the previous quarter’s -1.4 % but down 582 bps from the year-ago quarter.
Net Income
Yahoo’s pro forma net income was $12.24 million or 1.0% of sales compared to loss of $0.980 million or -0.1% of sales in the previous quarter and profit of $397.9 million or 34.7% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring, asset impairment and other charges 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 $76.3 million ($0.08 per share) compared to loss of $21.6 million (-$0.02 per share) in the Jun 2015 quarter and net income of $6.77 billion ($6.72 per share) in the Sep quarter of last year.
Balance Sheet
Yahoo’s cash and short term investments balance increased to $5.88 billion, up $57.7 million during the quarter. The company generated $137.3 million of cash from operations using $161.0 million for capex, $153.3 million on acquisitions but did not repurchase shares in the last quarter.
Guidance
Yahoo provided limited guidance for the fourth quarter of 2015. Accordingly, revenue on a GAAP basis is expected to be $1.16-1.20 billion, revenue on an ex-TAC basis $1920-960 million, adjusted EBITDA of $160-200 million and non GAAP operating income of $10-50 million.
Recommendation
Yahoo shares currently carry a Zacks Rank #4 (Sell).
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