Yahoo Earnings: Display Ad Revenues Disappointing, But Mobile And Video Platform Gains Traction

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Yahoo! ( YHOO ) reported its second quarter earnings Tuesday, July 15. The company's core advertising revenues continued to disappoint the markets as the revenues (excluding Traffic Acquisition Cost or TAC) declined by 3% year-on-year to $1.040 billion. Furthermore, the non-GAAP operating income declined by 72% to $38 million and non-GAAP net income declined by 1% to $382 million during the quarter.

While Yahoo's core search ad revenues (excluding TAC) improved by 6% year over year, its display ad revenues declined by over 7%. The primary reason for growth in search ads revenue was the growth in ad volume and increase in the price per click. Additionally, Yahoo's investment in Alibaba continued to reap benefits as the latter company's revenues grew by 42% year over year, albeit at a slower pace. Furthermore, Yahoo attracted a record number of mobile users to its properties during the quarter. While Yahoo's mobile platform continues to gain traction, it has now forayed into online mobile video streaming with the acquisition of RayV. In this note, we will discuss the highlights of Yahoo's earnings announcement.

See our complete analysis of Yahoo! here

Outlook For Third Quarter

For the third quarter, Yahoo expects revenues (ex-TAC) to be in $1.06-$1.1 billion range. Additionally, it expects adjusted EBITDA to be between $220 million and $360 million, and non-GAAP operating income to be between $70 million and $110 million.

Improvement Ad Volume And Price Per Click Buoys Revenues

Search ads make up 15% of Yahoo's estimated value. During the quarter, search ad revenues (ex-TAC) grew by 6% year over year  to $428 million. The company reported 3% growth in the number of paid clicks and 24% growth in price per click indicating the relevancy and improvement in Yahoo's content as advertisers increased their search ad spending across Yahoo sites. We expect these trends to continue in the coming quarters as advertisers increase spending across Yahoo sites search. Furthermore, we expect the international mix of total search to increase that can drag ad prices down. Going forward, we estimate RPS will decline from $13 to $12.

Display Ads Revenue Disappoints

The display ads division makes up 12% of Yahoo's estimated value. In Q2, the display ad revenues (ex-TAC) declined by 7% year over year to $394 million. While the number of display ads sold across Yahoo properties rose by 24%, the price per ad declined by 24% due to unfavorable shift in mix of premium ads to low cost ads.  Even though the company continues to roll out premium display content, it is yet to be fancied by advertisers who continue to spend less across Yahoo properties. Furthermore, we expect the international mix of total display ads to increase that can drag ad prices down. Going forward, we expect revenue per impression to remain flat.

Mobile Ads Stems Decline In Revenues

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 over 450 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, and thus improve revenue across both display and search ad divisions.

Furthermore, the Gemini marketplace, which was launched in 2010 and is a unified mobile search and native ad buying platform in the industry, now represents 50% of Yahoo!'s mobile display revenue in the United States. 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 $42 billion in 2017, according to Gartner.

Video Platform To Front And Center

As per our note published earlier, the company has intensified its efforts to enter the online video space. Last week the company announced the acquisition of  RayV, a company that is engaged in mobile online video streaming. Furthermore, the company has intensified its efforts to build a repository of original video programming that typically are shown on high end cable-TV network and streaming services such as Netflix. During the quarter, the company announced its partnership with Live Nation, which can now be seen on Yahoo! Screen, the company's videos content platform which is similar to You tube.

The earnings announcement confirms that the company has made substantial progress to launch its own video streaming site and leverage its core web properties to monetize its video offerings. According to our estimates, YouTube made around $3.7 billion in net revenues in 2013, and will rake in around $4.7 billion this year. If Yahoo's planned service can even make 10% of this estimated value, its top line can increase by $500 million.

We are in the process of updating our model. At present, we have a $34.78 price estimate for Yahoo! , which is in line with the current market price.

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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 , Investing Ideas , Stocks , US Markets

Referenced Stocks: YHOO , AOL , GOOG

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