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Yahoo 4Q Earnings: Slowing Mavens, Layoffs, $4B Write-down

Yahoo'sYHOO fourth-quarter adjusted numbers were disappointing to say the least, but that's not the only thing driving down shares.

Yahoo wrote down $4.46 billion of its goodwill and while management said that a good bit of this related to very old acquisitions, $1.2 billion was also off acquisitions made since 2012, so after Mayer joined the company.

Mavens growth is also slowing down : the business grew 57.8%, 60.2%, 43.1% and 25.9% year over year in the last four quarters, or 44.1% growth in 2015. But management guidance of $1.8 billion implies a growth rate of 8.7% this year. The slowdown was attributed to a maturing mobile search business, which management promised to double down on.

The company is undertaking major restructuring actions this year, including a reduction of the current workforce by 15% and closure of five offices in Dubai, Mexico City, Buenos Aires, Madrid and Milan. This is in addition to the 22 offices and 120 products that were shuttered over the past year. While the cost reductions will benefit the bottom line, it does make one wonder whether this is the beginning of the end.

Also, first-quarter revenue guidance was exceptionally weak .

Price declines in search continue but unlike Alphabet's GOOGL Google, this is not generating additional volumes.

The numbers in detail-

Revenue

Yahoo reported GAAP revenue of $1.27 billion, which was up 3.9% sequentially and 1.6% year over year. Traffic acquisition cost (TAC) was up 21.4% sequentially and 280.7% from last year. Excluding these costs in all periods, net revenue was flat sequentially and down 15.1% year over year, exceeding the Zacks Consensus Estimate by 5.6%.

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

Search revenue (ex-TAC) was down 2.4% sequentially and 28.0% year over year. Key metrics were a huge disappointment in the last quarter, with paid clicks dropping 10% year over year, the first time there was a decline in the last two years . The Microsoft MSFT RPS guarantee and Yahoo Japan contributed 3 points of the weakness. The price per click (PPC) grew 3%.

Display revenues (ex-TAC) grew 16.5% sequentially and 18.1% from the comparable quarter of 2014. The number of ads sold grew 8% from the year-ago quarter with the price per ad (PPA) growing 6%. While PPA grew in each of the last three years, the growth rate has been decelerating. So although the company has started compromising on prices, there hasn't been a resultant positive impact on volumes.

Mavens (mobile, video, native, social) grew 11.8% and 25.9% from the previous and year-ago quarters, respectively. The year-over-year comparison shows another notable deceleration , although the revenue share has grown from 30% to 37% during this time.

Mobile growth is extremely important because of the increasing use of mobile devices to connect to the Internet. Management recently started breaking out traffic-driven mobile revenue, which came to $449 million in the last quarter, of which Yahoo paid out $291 million to its revenue sharing partners. Net mobile revenue dropped 41.7% sequentially and 0.6% year over year . Mayer said that mobile monthly users tripled during her tenure to 600 million.

Other (fees, listings and leads) revenues were down 27.6% sequentially and 40.5% from last year.

Search, Display and Other platforms represented 38%, 47% and 15% of Yahoo's second-quarter ex-TAC revenue, respectively. The Search and Other segments performed below normal seasonality.

By geography : Yahoo generated around 77% of revenue on an ex-TAC basis from the Americas (down 1.6% sequentially and 15.3% from Dec 2014), around 8% came from the EMEA region (up 15.5% sequentially and down 11.1% year over year) and the balance from the Asia/Pacific (up 1.4% sequentially and down 15.5% year over year).

Margins

Yahoo generated a gross margin of 53.9% in the last quarter, down 318 bps sequentially and 1,932 bps year over year.

Total operating expenses of $729.5 million were up 1.4% sequentially and down 8.7% from the year-ago quarter. Product development and S&M were down sequentially and year over year as a percentage of sales but S&M increased.

The net result was an operating margin of -3.5% that was worse than the previous quarter's -1.5 % and the year-ago quarter's 9.4%.

Net Income

Yahoo's pro forma net loss was $39.0 million or -3.1% of sales compared to income of $12.2 million or 1.0% of sales in the previous quarter and profit of $192.3 million or 15.3% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring, asset impairment, goodwill impairment and other 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 loss was $4.43 billion ($4.70 per share) compared to income of $76.3 million ($0.08 per share) in the Sep 2015 quarter and net income of $166.3 million ($0.1 per share) in the Dec quarter of last year.

Balance Sheet

Yahoo's cash and short term investments balance was $5.88 billion at quarter-end, down $25.0 million during the quarter. The company generated $132.3 million of cash from operations using $125.8 million for capex, $1.1 million on acquisitions but did not repurchase shares in the last quarter ($2.7 billion remains under the current authorization).

Guidance

Yahoo provided very limited guidance for the first quarter of 2016. Accordingly, revenue on a GAAP basis is expected to be $1.05-1.09 billion, revenue on an ex-TAC basis $820-860 million, depreciation & amortization of $150 million, stock based expenses of $115 million adjusted EBITDA of $100-120 million, non GAAP operating income of -$50 to $30 million.

For 2016, Yahoo expects GAAP revenue of $4.40-4.60 billion, TAC of $1.00 billion, depreciation & amortization of $550 million, EBITDA of $700-800 million and non GAAP operating income of $150-250 million.

Recommendation

Yahoo shares currently carry a Zacks Rank #3 (Hold).

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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 Nasdaq, Inc.


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

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