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Yahoo 1Q 2015: Core Business Bleeding as Costs Rise (YHOO)

Yahoo! Inc.’s (NASDAQ:YHOO) first-quarter adjusted earnings of a little over 7 cents matched the Zacks Consensus Estimate


Yahoo reported GAAP revenue of $1.23 billion, which was down 2.2% sequentially and up 8.2% year over year. Traffic acquisition cost (TAC) was up 158.4% sequentially and 298.9% from last year. Excluding these costs in all periods, net revenue was down 11.8% sequentially, 4.0% year over year and 1.3% short of the Zacks Consensus Estimate.

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

Display revenues (ex-TAC) were down 4.6% sequentially and 6.7% from the comparable quarter of 2014. The number of ads sold jumped 29% from the year-ago quarter (it was up 14% in the December quarter). Price declines were slightly greater, however, going from 15% to 17%. The secular decline on the PC platform and legacy premium placements continues to impact segment sales and is being gradually offset by stronger sales in MVNS (mobile, video, native, social).

Search revenue (ex-TAC) was down 18.5% sequentially and 2.8% year over year. Key metrics were positive in the last quarter, with paid click growth going from 10% in the year-ago quarter to 21% and supported by a 3% increase in the price per click (prices grew 7% in the previous quarter). Revenue growth from partner sites outpaced growth on own sites, which led to increased revenue and lower net revenue for Yahoo. The domestic business was also impacted by higher revenue share with key partners like Mozilla (which also contributed to sales growth), while international was impacted by currency headwinds.

Mobile growth is impacting pricing at both segments. But growth on the platform 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 generated $391 million in the last quarter, of which Yahoo paid out $157 million to its revenue sharing partners. Net mobile revenue grew more than 47% sequentially and over 61% year over year with users currently at over 600 million. Traffic-driven desktop revenue dropped 1.6% from last year.

Other (fees, listings and leads) revenues were down 9.2% sequentially and 1.8% from last year. In the Jun 2014 quarter, Yahoo entered into a patent licensing agreement that will yield $20 million a quarter for four years and a smaller amount in the fifth year.

Display, Search and Other platforms represented 37%, 41% and 22% of Yahoo’s first-quarter ex-TAC revenue, respectively.

Yahoo generated around 78% of revenue on an ex-TAC basis from the Americas (down 10.4% sequentially and 1.8% from Mar 2014), around 7% came from the EMEA region (down 20.1% sequentially and 15.8% year over year) and the balance from the Asia/Pacific (down 13.7% sequentially and 9.5% year over year).


Yahoo generated a gross margin of 61.8% in the last quarter, down 1,143 bps sequentially and 936 bps year over year.

Total operating expenses of $795.7 million were flattish sequentially and up 3.8% from the year-ago quarter. Product development and G&A increased both sequentially and year over year as a percentage of sales, but was partially offset by sequential and year-over-year declines in S&M.

The net result was an operating margin of -3.1% that shrank 1,255 bps sequentially and 661 bps from the year-ago quarter.

Net Income

Yahoo’s pro forma net income was $71.4 million or 5.8% of sales compared to $192.3 million or 15.3% of sales in the previous quarter and $321.1 million or 28.3% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring charges and gain on sales of patents in the last quarter.

Including the special items and the amount given out to non-controlling interests, Yahoo’s GAAP net income was $21.2 million ($0.02 per share) compared to $166.3 million ($0.17 per share) in the Dec 2014 quarter and net income of $311.6 million ($0.30 per share) in the Mar quarter of last year.

Balance Sheet

Yahoo’s cash and short-term investments balance dropped to $5.29 billion, down $2.71 billion during the quarter. The company used $2.94 billion of cash in operations as it paid off $3.3 billion in taxes related to the Alibaba cash in the last quarter. It also spent $134.9 million on capex, $23.1 million on acquisitions and $203.8 million to repurchase shares in the last quarter.


Yahoo provided limited guidance for the first quarter of 2015. Accordingly, revenue on a GAAP basis is expected to be $1.21-1.25 billion, revenue on an ex-TAC basis $1.01-1.05 billion, with EBITDA of $240-260 million and non-GAAP operating income (excluding SBC of $110-120 million) of $90-110 million.

Our Take

The last quarter was disappointing for the core business although key elements of management focus (mobile, video, native and social) continued to look up. Numbers provided by management indicate that this business still has some way to go before it can replace the traditional display business that was built around premium placements on desktops. But we do see directional clarity in management actions/initiatives, and no one thought it was going to be an easy transition.

The search business also continues on the road to recovery and the focus on building a more profitable business is commendable. The agreement with Microsoft Corporation (NASDAQ:MSFT) was altered to Yahoo’s advantage, allowing it more options to present results and serve ads and also increasing its flexibility to partner with others in search. The RPS guarantee remains and revenue share to Yahoo is now up from 88% to 90%.

Mayer’s people-product-traffic-revenue strategy remains on track. Whether this is a good or bad thing will be evident over time, but “people” costs related to management focus areas are trending up even as total headcount declines significantly, so this may be worth watching going forward.

Yahoo shares currently carry a Zacks Rank #3 (Hold), so investors may want to look at other technology stocks like Autobytel Inc. (NASDAQ:ABTL), which carries a Zacks Rank #1 (Strong Buy). Facebook Inc. (NASDAQ:FB) and Groupon Inc (NASDAQ:GRPN) are also attractive at the moment, both carrying a Zacks Rank #2 (Buy).

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