) reported its third quarter earnings on Tuesday, October 15.
The company posted a 1% year-on-year decline in net revenues
(excluding Traffic Acquisition Cost, or TAC) to $1.08 billion.
However, the non-GAAP operating income declined by 27% to $173
million, and Non-GAAP net income declined by 24% to $358
million during the quarter. The company continuese to invest
heavily in building out its many businesses.
Yahoo's core display ad revenues (excluding Traffic Acquisition
Cost) continued to suffer and decreased by 7% year on year to $452
million. However, its search ad revenues (ex-TAC) grew by 3% year
to year to $426 million, primarily due to lower Traffic Acquisition
) in the quarter. However, Yahoo's investment in Alibaba and Yahoo!
Japan continued to reap benefits for the company.
During the third quarter, Yahoo made eight acquisitions to
strengthen its product and content offerings. Moreover, Yahoo
announced the launch of new advertising formats to bolster its ad
revenues in the future. Furthermore, the company attracted a record
number of users to its properties during the quarter. We believe
that the company can increase its revenues in the coming quarters
if it can monetize its increasing user base and content
See our complete analysis of Yahoo! here
Outlook For Fourth Quarter And Full Year 2013
For the fourth quarter, Yahoo expects revenues (ex-TAC) to be in
$1.18-$1.22 billion range. Additionally, it expects adjusted EBITDA
to be between $400 million and $420 million, and non-GAAP operating
income to be between $240 million and $260 million. Due to the
decline in revenues during the first half of the year, Yahoo has
revised its full-year guidance lower. For 2013, Yahoo now expects
revenues (ex-TAC) to be $4.4 billion to $4.45 billion, adjusted
EBITDA to be $1.48 billion to $1.5 billion, and non-GAAP operating
income to be $840 million to $860 billion.
Larger Stake In Alibaba To Boost Yahoo's value
According to its third-quarter earnings announcement, Alibaba
generated $1.7 billion in revenues, $856 million in operating
income and $717 million in net income during Q2
2013. The company announced an amendment to its share repurchase
with Alibaba on Tuesday, which reduces the maximum number of shares
that the company is required to sell in a qualified Initial Public
Offering to 208 million shares from 261.5 million. We believe that
this will positively impact Yahoo as it can now gain more from any
potential upside to Alibaba's valuation post IPO.
Search Ads Metrics Improves
According to our estimates, the Search Ad segment is the biggest
component of Yahoo's aggregate valuation and makes up just over 12%
of the company's value.
During the quarter, Search Ad revenues (including TAC) fell by
8% year-over-year to $435 million. Search ads revenue declined in
part due to the closure of its South Korean office. However, the
closure of its South Korean office positively impacted traffic
acquisition cost which declined to $9 million in the third quarter
from $60 million in the same period in previous year.
During the quarter, Yahoo redesigned its websites including
Yahoo Sports and Yahoo Games, as well as TV, music, weather,
movies, and Yahoo
to improve user experience and increase the number of searches
across these Yahoo properties. As a result, Yahoo reported over 20%
growth in the number of paid clicks within this extended family of
websites. Moreover, a change in ad mix in favor of ads from
emerging economies led the price per click to decline by 4%, which
in turn lowered revenue per search (RPS). We expect the
international mix of total search to increase going forward, which
should be a drag on overall RPS. Going forward, we estimate RPS
will decline from $13.50 to $13 by the end of our forecast
Unique User Count
Display advertising contributes just about 11% to its total
value according to our model. During the quarter, display ad
revenues ex-TAC declined by 7% to $421 million. The primary reason
for the decline in display ads was 7% year-on-year decline in the
price -per-ad sold across Yahoo properties.
Yahoo has taken prudent steps to bolster its display ad revenues
going forward. The company introduced new ad format in the quarter
that helped the company to post a 1% year-over-year increase in the
number of ads sold. Additionally, Yahoo began offering more premium
content through its partnerships with leading news and
entertainment brands, such as ABC News and CNBC. A rich
content portfolio is important for the company as it engages more
users and thus drives the growth in unique visitors across its
websites. The company reported that the number of unique users
across Yahoo's properties increased to over 800 million in the
quarter. While the company has yet to adequately monetize this
increase in user count, we believe that future looks bright as the
company was able to attract new advertisers during the quarter.
Mobile Platform Hits 390 Million Unique Visitors
In an earlier article, we argued that Yahoo's mobile platform
will drive its revenue growth going forward. Yahoo continued to
report growth in its total mobile unique visitors, which grew to
390 million in the quarter. 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.
Additionally, we believe that a strong mobile platform is
important for Yahoo as it can bolster Yahoo's revenue by capturing
a substantial piece of the global mobile advertising market, which
will stand at approximately $33 billion in 2015, according to
Publicis-owned ad agency ZenithOptimedia.
We currently have a
$29 price estimate
for Yahoo!, which is 10% below its current market price.
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