Yahoo Earnings: Slide In Core Advertising Derails Revenue Growth Once Again

Yahoo! (NASDAQ:YHOO) reported its fourth-quarter earnings January 23rd amidst news that it has delayed sale of its core assets to next quarter due to “work required to meet closing conditions,”. ^[1] As reported, the company’s core advertising revenues (including Traffic Acquisition Cost or TAC) improved by 15.4% year over year to $1.47 billion. However, the figure includes $302 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 $1.16 billion, 8% lower than the fourth quarter of 2015.

Nevertheless, Yahoo continued to report improvement in performance in its so-called Maven revenue (i.e., derived from Mobile, Video, Native and Social media) during the quarter. While GAAP MAVEN revenue (including TAC) grew by 25.0% to $590 million, non-Maven revenue grew by 9.9% to $824 million. (These figures include the change in revenue contribution amounting to $426 million) Additionally, mobile revenue grew by 57.7% to $459 million, while PC ads revenue improved by 2.6% to $955 million.

See our complete analysis of Yahoo! here

Mobile Ads Continue To Boost Revenues

In Q4, Yahoo’s mobile revenue was $459 million, up from $291 million in Q4 2015, an increase of 25.0% year over year, and it now contributes at least 31.6% of Yahoo’s traffic-driven revenue. ^[2] For 2016, the company reported that its mobile revenue grew by 42.6%  year over year to $1.49 billion. Additionally, the company continues to report that its mobile user base has grown in the past quarter and stood at over 650 million at the end of December 2016.  The company continues to implement its strategy to deliver content (live video streams, etc) through its newly launched apps such as Yahoo View on Android. This strategy will augur well in the coming quarters and translate into growth in mobile user base for the company. 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 Q4, the display ad revenues (including traffic acquisition cost) declined by 5% year over year to $573 million. While the number of display ads sold across Yahoo properties grew by 4%, the price per ad declined by 10%, 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. During the quarter, the company launched Yahoo Sports “Game of the Day” for the 2016-17 season of the NHL, connecting fans with free live games and in-game highlights. Furthermore, it partnered with Twitter to host the live stream of Thursday night NFL games. This is expected to boost display revenues by increasing the number of ads sold. 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, Yahoo’s search revenues (including TAC) grew by 45.3% after considering the change in revenue presentation contribution of $302 million. Excluding the change, Yahoo’s revenues declined by 12% to $464.59 million. For the quarter, despite an 18% improvement in price per click, its number of paid clicks (ad volume) declined by 21%. 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.

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. This deal is now expected to close in the second quarter of 2017. At present, we have a $35.54 price estimate for Yahoo!, which is 19% below the current market price.

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1. Yahoo Reports Fourth Quarter 2016 Results 8-K, January 23 2017, www.sec.gov [↩]
2. 8-K Q4 2016 [↩]