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Yahoo Tops, Postpones Guidance

Sejuti Banerjea

Yahoo! Inc. (YHOO) reported first quarter non-GAAP earnings that were up 13.2% sequentially and 47.3% year-over-year, exceeding the consensus estimate by 4 cents, or 17.4%.


Yahoo reported GAAP revenue of $1.22 billion, which was essentially flat both sequentially and year over year. TAC costs were down 4.9% sequentially and 10.4% from last year. Even excluding these costs in all periods, net revenue remained flat both sequentially and from last year, missing the consensus by 1.7% and well over management’s guidance.

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

Display revenues (ex-TAC) grew 4.3% sequentially and 1.5% from last year. The APAC region was again the strongest growing double-digits, with the Americas up slightly, offset by a 7% decline in the EMEA region. The improvement in North America was helped by higher media page views, contribution from the Interclick acquisition, much-improved sell-through of guaranteed placements resulting in better yields overall, as offset by softer pricing.

Yahoo’s position in display will be a key to its future growth, since most market research firms are projecting strong growth here due to underlying drivers, such as brand building on online properties. However, there is little confidence in Yahoo’s prospects, with most market research firms expecting the segment to be dominated by archrival Google (GOOG) and Facebook (FB). The company is steadily losing market share and it remains to be seen whether the new CEO can reverse the trend.

Search (ex-TAC) was flat sequentially and up 4.0% year over year. Yahoo maintained that owned and operated sites improved in the last quarter, with query volumes increasing slightly on a global basis and RPS staying positive. However the marketplace RPS did not progress much, although Yahoo is protected here by Microsoft’s (MSFT) RPS guarantee.  

Other (fees, listings and leads) revenues were down 7.4% sequentially, while increasing 7.0% from last year.

Display, Search and Other platforms represented 44%, 36% and 20% of Yahoo’s second quarter revenue, respectively.

Yahoo generated around 72% of revenue on an ex-TAC basis from the Americas (down 2.2% sequentially and up 0.9% from June 2011), around 9% came from the EMEA region (up 6.4% sequentially and down 10.5% year over year) and the balance from the Asia/Pacific (up 7.8% sequentially and up 4.2% year over year).


Yahoo generated a gross margin of 65.9% in the last quarter, down 152 bps sequentially and 285 bps year over year. Total operating expenses of $618.4 million were down 4.6% from the previous quarter and up 5.4% from the year-ago quarter.

Product development costs were down as a percentage of sales from the previous and year-ago quarters, while S&M also declined from both quarters though not as significantly. G&A was up from both quarters. The net result was an operating margin of 15.1% that increased 76 bps sequentially and declined 45 bps from the year-ago quarter.

Net Income

Yahoo’s pro forma net income was $328.4 million or 27.0% of sales compared to $291.1 million or 23.8% of sales in the previous quarter and $238.7 million or 19.4% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring charges and Alibaba sale-related charges on a tax-adjusted basis in the last quarter.

Including these special items and the amount given out to non-controlling interests, Yahoo’s GAAP net income was $226.6 million ($0.19 per share) compared to $286.3 million ($0.23 per share) in the March 2012 quarter and net income of $237.0 million ($0.18 per share) in the June quarter of last year.

Balance Sheet

Yahoo has a solid balance sheet, with cash and short term investments of $1.91 billion, down $299.4 million during the quarter. The company generated $330.6 million from operations in the last quarter and spent $171.5 million on capex.

After adjusting for this and excess tax benefits from stock awards, free cash flow came to around $93.4 million, down significantly on a sequential basis. The company also spent $455.5 million on share repurchases in the last quarter. Yahoo does not have any debt.

To conclude

Yahoo’s CEO has changed again, but it’s hard to tell whether this will lead to a turnaround in the company’s business. We think this remains an uphill task given the company’s declining position in display and the monetization issues related to Microsoft’s search platform. In the meantime, we continue to see Yahoo’s search market share dwindling. Search-related issues are likely to continue for a few more quarters at least and even after that, growth remains uncertain given the tough competition.  

Cost controls and efficiencies are likely to continue. However, we expect management to continue investing in the business, which could be a pressure on operating margins.

Therefore, while the improving ad market will continue to benefit Yahoo and a leaner cost structure will help cash flow and earnings growth, these factors will be mitigated by competitive pressures.

The shares carry a Zacks Rank of #2 (short-term Buy recommendation). We are Neutral longer term (3-6 months).

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