Yahoo Beats Estimates in Q4 - Analyst Blog

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Yahoo ( YHOO ) reported fourth-quarter earnings that were up 38.7% sequentially and 28.4% year over year, exceeding the Zacks Consensus Estimate by 10 cents, or 33.3%. Yahoo shares traded up during the day but lost some of the gains after the company reported results. This isn't really a negative as the after-market movement looks like a correction.

Earnings were driven by the core business for a change, although other assets and the tax rate were positive for the year-over-year comparison. Operating leverage was apparent in the sequential comparison.

Pricing remains a sore point across the board, but management brushed it aside, saying that the Display side was impacted by stream ads which had great long-term potential, while the Search side was essentially on account of a mix shift to mobile and emerging markets.

The numbers in detail-

Revenue

Yahoo reported GAAP revenue of $1.27 billion, which was up 11.1% sequentially and down 5.9% year over year. Traffic acquisition cost (TAC) was up 12.2% sequentially and down 47.5% from last year. Excluding these costs in all periods, net revenue was up 11.1% sequentially and down 1.7% year over year, just short of our expectations.

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

Display revenues (ex-TAC) were flat sequentially and up 16.5% sequentially and down 1.7% from the comparable quarter of 2012. Yahoo's Display initiatives appear to struggling, since the increase in the number of ads sold was just slightly higher than in the last two quarters, while the price per ad continued to decline at the same rate.

Pricing remains a negative due to lower premium ads sold and the rollout of streaming ads, which currently carry weak prices. But management appears optimistic about the prospects of streaming ads, especially on the mobile platform. So pricing could improve in ensuing quarters.

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, Yahoo still has much to prove, given the growing success of rivals Google ( GOOG ) and Facebook ( FB ).

Search (ex-TAC) was up 8.3% sequentially and 8.0% year over year. Improved ad formats and better user experience continued to drive click-through rates. The number of paid clicks (excluding career) jumped 17% from last year, the seventh straight quarter of growth. However, the price per click dropped 3%, which Yahoo attributed to a continued mix shift to international markets. These comparisons exclude the effects of Korea and the Microsoft ( MSFT ) guarantee.  

Other (fees, listings and leads) revenues were up 6.5% sequentially and down 9.2% from last year.

Display, Search and Other platforms represented 41%, 38% and 21% of Yahoo's fourth quarter revenue, respectively.

Yahoo generated around 76% of revenue on an ex-TAC basis from the Americas (up 12.0% sequentially and 0.5% from Dec 2012), around 8% came from the EMEA region (up 18.3% sequentially and down 2.9% year over year) and the balance from the Asia/Pacific (up 4.1% sequentially and down 10.2% year over year).

Margins

Yahoo generated a gross margin of 73.2% in the last quarter, up 217 bps sequentially and 261 bps year over year.

Total operating expenses of $680.7 million were down 5.0% from the previous quarter and up 2.0% from the year-ago quarter. All expenses declined sequentially as a percentage of sales, but product development and G&A were significantly higher than in the year-ago quarter.

The net result was an operating margin of 19.4% that expanded 1,135 bps sequentially and shrank 160 bps from the year-ago quarter.

Net Income

Yahoo's pro forma net income was $412.8 million or 32.6% of sales compared to $298.4 million or 26.2% of sales in the previous quarter and $361.7 million or 26.9% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring and goodwill impairment charges on a tax-adjusted basis in the last quarter.

Including the special items and the amount given out to non-controlling interests, Yahoo's GAAP net income was $348.2 million ($0.34 per share) compared to $296.7 million ($0.28 per share) in the Sep 2013 quarter and net income of $272.3 million ($0.23 per share) in the Dec quarter of last year.

Balance Sheet

Yahoo has a solid balance sheet, with cash and short-term investments of $3.41 billion, which increased by $1.58 billion during the quarter because it raised $1.11 billion in debt. The company generated $347.7 million from operations in the last quarter, spending $108.8 million on capex, $60.3 million on acquisitions and $231.3 million on share repurchases in the last quarter.

Guidance

Yahoo provided limited guidance for the first quarter of 2014. Accordingly, revenue on a GAAP basis is expected to be $1.12-1.16 billion, revenue on an ex-TAC basis $1.06-1.10 billion, with adjusted EBITDA of $290-330 million and non GAAP operating income of $130-170 million. The tax rate going forward is expected to be around 37%.

Recommendation

Yahoo remains focused on getting the right people on board, which would result in properly focused products, leading to stronger traffic and thereby, revenue. The company is of course helping the process with suitable acquisitions. Acquisitions will continue moving forward, with the focus shifting somewhat to new ad products and the shoring up of its video capabilities.

Firing and hiring at the company are things to watch keenly, since this could mean either weaker-than-expected performance or new directions in the business.

It's also worth noting that we are roughly half-way through the three-year period Mayer had set for a turnaround and the company appears to be on track.

Still, concerns over Yahoo's core business and the persistent pressure on prices continue to weigh on investor sentiments.

Yahoo shares currently have a Zacks Rank #4 (Sell).



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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: FB , GOOG , MSFT , TAC , YHOO

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