Yahoo Earnings: Search And Display Revenue Growth Continues To Elude The Company

Yahoo! (NASDAQ:YHOO) reported its third-quarter earnings Tuesday, October 18th. ^[1] As reported, the company’s core advertising revenues (including Traffic Acquisition Cost or TAC) improved by 6.5% year on year to $1.305 billion. However, the figure includes $258 million in GAAP revenue and cost of revenue that is mandated by an amendment to the Microsoft Search agreement. Had the change not been implemented, Yahoo’s GAAP revenue would have been $1,048 million, a 15% lower than the third quarter of 2015, and cost of revenue (i.e., TAC) would have been $190 million, a 15% lower than the third quarter of 2015.

Yahoo continued to report improvement in performance in the up and coming Mobile, Video, Native and Social (MVNS) ads vertical during the quarter. While GAAP MVNS revenues (including TAC) grew by 24.2% to $524 million, non-Maven (i.e., MVNS) revenues grew by 4.76% to $726 million. (These figures include the change in revenue contribution) Additionally, mobile revenue grew by 46.1% to $396 million, while PC ads revenue improved by 1.2% to $854 million. While Yahoo’s gross search ad revenues declined by 14% to $752 million, its display ad revenues declined by 7% to $476 million in the quarter. In this note, we will discuss the highlights of Yahoo’s earnings announcement.

See our complete analysis of Yahoo! here

Outlook For Fourth Quarter 2016

For the fourth quarter, Yahoo expects revenues (ex-TAC) to be in $1360-$1400 million range. Additionally, it expects adjusted EBITDA to be between $260 million and $300 million, and non-GAAP operating income to be between $140 million and $180 million. This guidance indicates that the company expects some improvement in its core business, primarily due to launch of new products such as Yahoo Newsroom and Yahoo View.

Mobile Ads Continue To Boost Revenues

In Q3, Yahoo’s mobile revenue was $396 million, up from $271 million in Q3 2015, an increase of 46.1% year over year, and it now contributes at least 32% of Yahoo’s traffic-driven revenue. ^[2] Additionally, the company continues to report that its mobile user base has grown in the past quarter. In the coming quarters, we expect the mobile user base to increase further as the company implements its strategy to deliver new content (live video streams, etc). The growth in its unique visitor count is important for Yahoo, as a bigger user base will consume more content across Yahoo’s websites. This, in turn, will translate into higher page views and searches across all Yahoo platforms, and thus improve revenue across both display and search ads divisions.

Display Ad Revenue Grows

In Q3, the display ad revenues (including traffic acquisition cost) declined by 7% year over year to $476 million. While the number of display ads sold across Yahoo properties declined by 5%, the price per ad improved by 1%, driven by an improved mix of video inventory. Additionally, Trefis believes that Yahoo’s video ads revenues will improve in the future due to streaming of live events such as MLB games, and thus boost display revenue. This would offset the decline in revenues from desktop display ads to some extent.

Improvement In Ad Volume And Contract With Google In Focus

During the quarter, despite improvement in price per click (9% growth), its number of paid clicks (ad volume) declined by 22%. As a result, Yahoo’s search click driven revenue declined by 15% and the company reported that its search revenues (including TAC) declined by 15% before considering the change in revenue presentation contribution of $258 million. Including the change, Yahoo’s revenues improved by 36.3% to $703 million.

Despite numerous agreements such as agreement with Mozilla and Google, Yahoo’s search ads has failed to gain a firm foothold in the search ads industry. Trefis expects this trend to continue in the Q4 and search revenue to decline.

While we are in the process of updating our model, the company is working through the sale of its core business to Verizon for $4.83 billion, with Verizon. At present, we have a $34.55 price estimate for Yahoo!, which is 17% above the current market price.

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1. Yahoo Reports Third Quarter 2016 Results 8-K, October 18 2016, www.sec.gov [↩]
2. 8-K Q3 2016 [↩]