) reported third quarter non-GAAP earnings that were up 31.2%
sequentially and 81.0% year-over-year, exceeding the consensus
estimate by 11 cents, or 45.8%. The average surprise in the
preceding four quarters was 26.0%, so the quarter's results were
very strong in comparison. Yahoo shares responded as may be
expected, jumping 4.6% in after-hours trading.
Yahoo reported GAAP revenue of $1.20 billion, which was down
1.3% sequentially and 1.2% year over year. TAC costs were down
17.7% sequentially and 22.2% from last year. Excluding these
costs in all periods, net revenue was essentially flat on a
sequential basis and up 1.6% from last year, in line with the
Yahoo combines revenue from O&O and affiliate sites and
presents under Display and Search.
Display revenues (ex-TAC) dropped 4.6% sequentially and 1.was
consistent with the comparable quarter of 2011. The Americas (up
4%) was the only region to see some notable growth in the last
quarter, which was however supported by flattish results in both
the APAC and EMEA regions. The product mix helped results in the
Americas, with Class 1 impressions continuing to do well, while
Class 2 continued to decline. Macro conditions in Europe weakened
results in the EMEA.
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, there is little confidence in Yahoo's
prospects, with most market research firms expecting the segment
to be dominated by archrival
). The company is steadily losing market share and it remains to
be seen whether the new CEO can reverse the trend.
Search (ex-TAC) was up 7.4% sequentially was 10.6% year over
year. Yahoo said that guaranteed placements helped results in the
last quarter, as did the positive RPS. Yahoo is still
) RPS guarantee.
Other (fees, listings and leads) revenues were flat
sequentially, while declining 9.9% from last year.
Display, Search and Other platforms represented 41%, 38% and
21% of Yahoo's third quarter revenue, respectively.
Yahoo generated around 74% of revenue on an ex-TAC basis from
the Americas (up 3.4% sequentially and up 6.5% from September
2011), around 7% came from the EMEA region (down 15.8%
sequentially and 17.9% year over year) and the balance from the
Asia/Pacific (down 1.7% sequentially and 6.4% year over
Yahoo generated a gross margin of 67.1% in the last quarter,
up 126 bps sequentially and down 130 bps year over year. Total
operating expenses of $629.9 million were up 1.9% from the
previous quarter and up 7.8% from the year-ago quarter. Product
development costs were up as a percentage of sales, partially
offset by higher cost of sales, with both S&M and G&A
However, product development and S&M declined
significantly on a year-over-year basis, partially offset by
PTEHR costs that increased. The net result was an operating
margin of 14.7% that declined 38 bps sequentially and increased
241 bps from the year-ago quarter.
Yahoo's pro forma net income was $421.5 million or 35.1% of
sales compared to $328.4 million or 27.0% of sales in the
previous quarter and $245.5 million or 20.2% of sales in the
year-ago quarter. Our pro forma estimate excludes restructuring
charges and Alibaba sale-related gains on a tax-adjusted basis in
the last quarter.
Including these special items and the amount given out to
non-controlling interests, Yahoo's GAAP net income was $3.16
billion ($2.64 per share) compared to $226.6 million ($0.19 per
share) in the June 2012 quarter and net income of $293.3 million
($0.23 per share) in the September quarter of last year.
Yahoo has a solid balance sheet, with cash and short term
investments of $8.41 billion, up $6.50 billion during the
quarter. The company generated $1.05 billion from operations in
the last quarter and spent $139.9 million on capex.
After adjusting for this and excess tax benefits from stock
awards, free cash flow came to around $920.4 million, up
significantly on a sequential basis. The company also spent
$190.4 million on share repurchases in the last quarter. Yahoo
does not have any debt.
Yahoo provided some encouraging commentary about product
innovation, which following the better-than-expected third
quarter results went down well with investors. However, a
turnaround in the company's business remains an uphill task given
the company's declining position in display and search, the
monetization issues related to Microsoft's search platform, and
Yahoo's lagging in several emerging segments, such as mobile,
social and the cloud.
Cost controls and efficiencies are likely to continue.
However, we expect management to continue investing in the
business, which would be a pressure on operating margins.
We remain cautious about the company despite its cheap
valuation because interesting management commentary could simply
be history repeating itself. Further clarity regarding the game
plan would make us more optimistic.
Also, while the improving ad market will continue to benefit
Yahoo and a leaner cost structure will help cash flow and
earnings growth, these factors will be mitigated by competitive
The shares carry a Zacks Rank of #3 (short-term Hold
recommendation). We are also Neutral longer term (3-6
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