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Yahoo! Reports Earnings and New Search Ad Pact

Jon C. Ogg

Yahoo! Inc. (YHOO) has reported its third quarter earnings, with the report being $0.15 in adjusted earnings per share versus the $0.17 EPS estimate from Thomson Reuters. Revenue came in at $1.23 billion versus $1.26 billion expected.

A new search advertising deal with Google Inc. (GOOGL), which is non-exclusive and allows continued use of services under the Microsoft Corp. (MSFT) agreement, was also released on Tuesday via an SEC filing.

Yahoo! broke out the quarterly revenues as follows, with GAAP revenue growing to $1.226 billion from $1.148 billion a year earlier. Mavens revenue rose to $422 million in the third quarter of 2015 versus $295 million a year earlier. Mavens revenue represented 29 percent of traffic-driven revenue in the third quarter of 2014, and increased to 38 percent in the third quarter of 2015.

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Also on a GAAP basis -- Its non-Mavens revenue, the core Yahoo!, saw revenues of $693 million in this quarter versus $727 million a year ago. Yahoo! showed that its traffic-driven revenue rose to $1.115 billion versus $1.022 billion a year ago, while non-traffic-driven revenue contracted to $111 million from $126 million.

Mobile revenue rose to $271 million, versus $207 million a year ago. PC-driven revenues rose to $1.115 billion from $1.022 billion a year earlier. Mobile revenue represented 20 percent of traffic-driven revenue in the third quarter of 2014, and increased to 24 percent in the third quarter of 2015. Gross mobile revenue for the third quarter of 2014 and 2015 was approximately $345 million and $424 million, respectively.

Search revenue was broken out as well. Gross search revenue was $870 million for the third quarter of 2015, up 2 percent compared to the third quarter of 2014.  GAAP search revenue was $509 million for the third quarter of 2015, up 13 percent compared to the third quarter of 2014.
The traffic acquisition cost, its cost of revenue, paid to search partners was $119 million for the third quarter of 2015 (includes TAC from the Mozilla agreement) versus $3 million in the third quarter of 2014. The number of Paid Clicks rose about 5 percent compared versus a year earlier, while the price-per-click decreased approximately 2 percent compared to the third quarter of 2014.

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Yahoo! announced that its cash and cash equivalents were $6.8 billion as of September 30, 2015 versus $10.2 billion at the end of 2014. In the first quarter of 2015, Yahoo! satisfied the $3.3 billion income tax liability related to the sale of Alibaba Group ADSs in September 2014.

The SEC Filing showed terms of the search and advertising pact, quoted verbatim from the release to avoid any changes:

On October 19, 2015, Yahoo! Inc., a Delaware corporation (“Yahoo”), and Google Inc., a Delaware corporation (“Google”), entered into a Google Services Agreement (the “Services Agreement”). The Services Agreement is effective as of October 1, 2015 and expires on December 31, 2018. Pursuant to the Services Agreement, Google will provide Yahoo with search advertisements through Google’s AdSense for Search service (“AFS”), web algorithmic search services through Google’s Websearch Service, and image search services. The results provided by Google for these services will be available to Yahoo for display on both desktop and mobile platforms. Yahoo may use Google’s services on Yahoo’s owned and operated properties (“Yahoo Properties”) and on certain syndication partner properties (“Affiliate Sites”) in the United States (U.S.), Canada, Hong Kong, Taiwan, Singapore, Thailand, Vietnam, Philippines, Indonesia, Malaysia, India, Middle East, Africa, Mexico, Argentina, Brazil, Colombia, Chile, Venezuela, Peru, Australia and New Zealand.

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Under the Services Agreement, Yahoo has discretion to select which search queries to send to Google and is not obligated to send any minimum number of search queries. The Services Agreement is non-exclusive and expressly permits Yahoo to use any other search advertising services, including its own service, the services of Microsoft Corporation or other third parties.

Google will pay Yahoo a percentage of the gross revenues from AFS ads displayed on Yahoo Properties or Affiliate Sites. The percentage will vary depending on whether the ads are displayed on U.S. desktop sites, non-U.S. desktop sites or on the tablet or mobile phone versions of the Yahoo Properties or its Affiliate Sites. Yahoo will pay Google fees for requests for image search results or web algorithmic search results.

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Yahoo! shares were marginally lower in the after-hours session after closing down 2% at $32.83, with shares initially down 0.7% at $32.65 on last look. Yahoo! has a 52-week trading range of $27.20 to $52.62 and a consensus analyst price target of $45.03.

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