Yahoo Earnings Preview: Decline In Revenue To Continue

Yahoo! (NASDAQ:YHOO) is set to report its third-quarter results on Tuesday, October 18th. The stock has outperformed the market amidst news that its core business was sold for close to $4.83 billion to Verizon in July. The stock has grown by 32% in last nine months, while the return on NASDAQ composite index is close to 9.54%. However, Yahoo’s core business has failed to deliver the necessary traction in revenues from the online ads industry.  As a result, the sale to Verizon can be considered a step in the right direction as the Verizon, together with AOL, can aggressively target mobile devices for display (video), social and native ads through Yahoo’s programmatic platform and boost its organic revenues. While the deal is expected to close in the first quarter of 2017, we believe that the company will continue to report little or no improvement in revenue growth due to secular decline in its online ads business. In this earnings announcement, we will closely monitor the search and display ads divisions for growth in revenues from the mobile segment as the company continues to push for more services in this domain.

See our complete analysis of Yahoo! here

Outlook For Third Quarter 2016

For the third quarter, Yahoo expects revenues (ex-TAC) to be in $1.275-$1.325 billion range. Additionally, it expects adjusted EBITDA to be between $190 million and $220 million, and non-GAAP operating income to be between $65 million and $95 million. This guidance indicates that the company will continue to report a decline in the core business.

Mobile Audience To Boost Ad Served and Revenues

As we have noted, Yahoo’s display ads and search ads divisions make up 4.8% and 5.6% of its value, respectively, according to our estimates. Both these divisions have struggled for substantial growth in revenues due to the stiff competition for ad dollars from companies such as Google and Microsoft. To address this issue, Yahoo is aggressively targeting mobile devices. As a result of past efforts, Yahoo’s mobile platform hit approximately 600 million unique visitors in 2015 and its properties have over a billion unique visitors every month.

Furthermore, as the company has focused on developing and delivering content on its mobile platform, user engagement has improved. This growth was instrumental in increasing its page views as it translates to more consumption of content across Yahoo properties. In Q2, Yahoo’s mobile revenue was $378 million, up from $252 million in Q2 2015, an increase of 50% year over year.  In the upcoming earnings announcement, we will be closely monitoring the growth in unique mobile visitors, which will thereby improve revenues from its display ads business. Additionally, we want to know what impact the growth in search on mobile devices will have on Yahoo’s revenue per search (RPS).

Display Ads Under Scanner

The display ads division makes up 4.8% of Yahoo’s estimated value. In Q2, division revenues declined by 6.19% year over year to $469 million. The number of display ads sold across Yahoo properties rose by 9%,  largely due to assimilation of BrightRoll). Yet the price per ad declined by 15%, due both to continued pressure on premium ads (especially video) and to the shift to the programmatic platform. Yahoo has stated that MVNS ads, having grown by over 25% year over year in the previous quarter, are expected to boost display revenue in the future and offset the decline in revenues from desktop display ads. Furthermore, we expect the international mix of total display ads to increase, which can drag ad prices down. We believe that these trends continued to impact display ad revenues in Q3 as well. As a result, we expect revenue per impression to decline in the future.

Search Ads To Improve

Search ads make up 5.6% of Yahoo’s estimated value. In Q2, search ad revenues (including Traffic Acquisition Cost) grew by to 36.5% to $711.49 million, primarily due both to its contracts with Mozilla and Google, which boosted its gross search revenues (including TAC),  and to the appropriation of some of other revenues into search ads division. While the company reported a 24% decline in the number of paid clicks, price-per-click improved by 8%, indicating the relevancy and improvement in Yahoo’s content as more users used Yahoo for their search queries. Revenue growth eluded company, however,  as the product mix indicated more ads sales on mobile devices, which have a lower cost per click compared to PC ads. We believe the trend continued in Q3 and that the monetization rate remained low, as advertisers continue to limit their ad spending across Yahoo sites.

We currently have a $34.55 price estimate for Yahoo!, which is 16% below the current market price.

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