Yahoo! Inc. (YHOO) is expected to report second quarter results after the market closes on July 19. Given the strong ad market, we expect a moderate beat.
Yahoo’s story is tied to CEO Carol Bartz’s turnaround plan; therefore, with things going rather slow on that front, there are limited catalysts to drive estimates either up or down. That said, the company has delivered an average earnings surprise of over 16% in the last four quarters, which is not bad, considering the multiple issues facing Yahoo right now.
Bartz had waxed eloquent about Yahoo’s leadership in display and where it intended to go from there. And indeed, Yahoo! remains an important player in the display market, with the largest share at big advertisers. With market research firms projecting that display will continue to grow in importance over the next few years, overtaking search advertising revenue by 2015, Yahoo! should see good growth in the area.
However, there are a couple of factors that will likely work against it. The first is the growing importance of Google Inc’s (GOOG) display network, which has steadily expanded the market in the SMB segment and enabled it to displace Yahoo! as the biggest player in the overall display ad market. We think there is limited satisfaction in the fact that Yahoo! remains well positioned at the big players. The writing appears to be on the wall.
The second thing that could work very rapidly to eat its share is the growing importance of social networking platforms, particularly Facebook. Facebook is already picking up a good amount of ads and since the platform encourages sharing of personal preferences and choices, ad placements are likely to be well targeted. Unlike Google, which has been very focused on its social efforts (however badly bungled in the past), we have not seen major initiatives from the Yahoo! camp.
Search remains a weak spot for Yahoo!, although management continues to emphasize the fact that engagement on Yahoo! properties is up. The fact remains it lost market share in June, with Google grabbing half of it and Microsoft Corp (MSFT) picking up the rest. The search alliance is on, but way behind schedule. Monetization efforts are below expectations although advertisers are seeing good ROI. We think the bottom line counts at this point, although the payment plans are favorable for Yahoo! and provide some downside risk.
With the top line trudging along less than smoothly, Yahoo! has necessarily been disciplined on the bottom line. Expense control has been great, and we expect this to remain a focus area.
Another much hyped driver remains the company’s Asian assets, which are of dubious value in our opinion, since much seems to be going on in both Japan and China, with the end result being assurances of “progress”.
At any rate, given the above, we are hardly surprised that there have been practically no estimate revisions in the last 30 days, with the Zacks Consensus Estimates for the June quarter and fiscal 2011 remaining exactly where they were at 18 and 79 cents, respectively. Estimates for 2012 also remain unchanged at 91 cents, clearly indicating that analysts are not expecting any miracles.
The Zacks Rank on Yahoo! shares is #3 (Hold rating over the next 1-3 months). We are also Neutral over the long term (3-6 month timeframe).
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