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Yahoo (YHOO) Stock 1Q Earnings Preview: Prepping For A Sale

Yahoo YHOO is expected to report first-quarter earnings on Apr 19 after the bell. The company has a Zacks Rank #3 (Hold) and Earnings ESP of 0.00, which makes surprise prediction difficult. Our proprietary model shows that a Rank #3 stock can generate a positive surprise when the Earnings ESP is positive although Zacks Rank #1 or #2 (buy-rated stocks) are better. We generally don’t recommended sell rated stocks (Zacks Rank #4 or #5) going into the earnings season.

Let’s See What Happened Last Quarter

Yahoo’s fourth quarter revenue managed to beat the Zacks Consensus Estimate although its earnings were disappointing. That was only part of the story. Not only did the company write down $4.46 billion in goodwill, it also admitted that more than a billion of that was from acquisitions made by current CEO Marisa Mayer.

The core Mavens business continued to decelerate (grew 57.8%, 60.2%, 43.1% and 25.9% year over year in the last four quarters, or 44.1% growth in 2015). Moreover, management guidance of $1.8 billion implied a growth rate of 8.7% this year, so even more of a slowdown.

Management blamed the Mavens slowdown on a maturing mobile search business and sure enough, overall search results were horrendous: Paid clicks dropped 10% year over year, the first decline in the last two years.

To top it all, guidance was dismal. For quarter one, Yahoo projected revenue on a GAAP basis of $1.05-1.09 billion and revenue on an ex-TAC basis of $820-860 million, both numbers reflecting significantly lower average growth than in the last five years. It also projected depreciation & amortization of $150 million, stock based expenses of $115 million adjusted EBITDA of $100-120 million and non GAAP operating income of -$50 to $30 million.

Full-year projections were revenue of $4.40-4.60 billion (down 9.4%), TAC of $1.00 billion, depreciation & amortization of $550 million, EBITDA of $700-800 million and non GAAP operating income of $150-250 million.

In short, growth rates are coming to a screeching halt. In that light of course the recently announced restructuring actions made sense; including the 15% reduction in workforce and closure of five offices in Dubai, Mexico City, Buenos Aires, Madrid and Milan. (This was in addition to the 22 offices and 120 products that were shuttered last year.)

More Bad News?

Mayer said that since things were not doing so good, the underperforming parts of the business needed to be hacked. While this would further reduce overall revenue, there would be a positive impact on profitability.

This set the stage for the announcement earlier this month (through statements to prospective buyers) that 2016 revenue would decline 15% and earnings over 20%. Further, the workforce would be further cut by 1.5K to 9K. Total restructuring charges are expected to be $64-78 million, of which $40-48 million was for severance and related cash expenditures.   

Going Forward

All the bad news is right there before us so suffice it to say that there won’t be too many surprises when Yahoo reports after the bell on Apr 19. The only thing that could move the shares is some update on the sale plans that everyone is hankering for.

Some other companies expected to report this week are Intel Corp INTC, Advanced Micro Devices AMD, Alphabet GOOGL and Microsoft MSFT. Of these, our model says that only Intel has a good chance of beating estimates this quarter.

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