) reported first quarter non-GAAP earnings that were up 13.2%
sequentially and 47.3% year-over-year, exceeding the consensus
estimate by 4 cents, or 17.4%.
Yahoo reported GAAP revenue of $1.22 billion, which was
essentially flat both sequentially and year over year. TAC costs
were down 4.9% sequentially and 10.4% from last year. Even
excluding these costs in all periods, net revenue remained flat
both sequentially and from last year, missing the consensus by 1.7%
and well over management's guidance.
Yahoo combines revenue from O&O and affiliate sites and
presents under Display and Search.
Display revenues (ex-TAC) grew 4.3% sequentially and 1.5% from
last year. The APAC region was again the strongest growing
double-digits, with the Americas up slightly, offset by a 7%
decline in the EMEA region. The improvement in North America was
helped by higher media page views, contribution from the Interclick
acquisition, much-improved sell-through of guaranteed placements
resulting in better yields overall, as offset by softer
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 flat sequentially and up 4.0% year over
year. Yahoo maintained that owned and operated sites improved in
the last quarter, with query volumes increasing slightly on a
global basis and RPS staying positive. However the marketplace RPS
did not progress much, although Yahoo is protected here by
) RPS guarantee.
Other (fees, listings and leads) revenues were down 7.4%
sequentially, while increasing 7.0% from last year.
Display, Search and Other platforms represented 44%, 36% and 20%
of Yahoo's second quarter revenue, respectively.
Yahoo generated around 72% of revenue on an ex-TAC basis from
the Americas (down 2.2% sequentially and up 0.9% from June 2011),
around 9% came from the EMEA region (up 6.4% sequentially and down
10.5% year over year) and the balance from the Asia/Pacific (up
7.8% sequentially and up 4.2% year over year).
Yahoo generated a gross margin of 65.9% in the last quarter,
down 152 bps sequentially and 285 bps year over year. Total
operating expenses of $618.4 million were down 4.6% from the
previous quarter and up 5.4% from the year-ago quarter.
Product development costs were down as a percentage of sales
from the previous and year-ago quarters, while S&M also
declined from both quarters though not as significantly. G&A
was up from both quarters. The net result was an operating margin
of 15.1% that increased 76 bps sequentially and declined 45 bps
from the year-ago quarter.
Yahoo's pro forma net income was $328.4 million or 27.0% of
sales compared to $291.1 million or 23.8% of sales in the previous
quarter and $238.7 million or 19.4% of sales in the year-ago
quarter. Our pro forma estimate excludes restructuring charges and
Alibaba sale-related charges on a tax-adjusted basis in the last
Including these special items and the amount given out to
non-controlling interests, Yahoo's GAAP net income was $226.6
million ($0.19 per share) compared to $286.3 million ($0.23 per
share) in the March 2012 quarter and net income of $237.0 million
($0.18 per share) in the June quarter of last year.
Yahoo has a solid balance sheet, with cash and short term
investments of $1.91 billion, down $299.4 million during the
quarter. The company generated $330.6 million from operations in
the last quarter and spent $171.5 million on capex.
After adjusting for this and excess tax benefits from stock
awards, free cash flow came to around $93.4 million, down
significantly on a sequential basis. The company also spent $455.5
million on share repurchases in the last quarter. Yahoo does not
have any debt.
Yahoo's CEO has changed again, but it's hard to tell whether
this will lead to a turnaround in the company's business. We think
this remains an uphill task given the company's declining position
in display and the monetization issues related to Microsoft's
search platform. In the meantime, we continue to see Yahoo's search
market share dwindling. Search-related issues are likely to
continue for a few more quarters at least and even after that,
growth remains uncertain given the tough competition.
Cost controls and efficiencies are likely to continue. However,
we expect management to continue investing in the business, which
could be a pressure on operating margins.
Therefore, 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 #2 (short-term Buy
recommendation). We are Neutral longer term (3-6 months).
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