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Yahoo (YHOO) 1Q Earnings Beat, Management Doubles Down On Sale

Yahoo’s YHOO first-quarter adjusted numbers managed to edge past estimates with share prices up 1.05% in response.

CEO Mayer further defined the focus areas for the company: “Search, Mail and Tumblr, and four core verticals (news, sports, finance and lifestyles), in our priority markets (the U.S., Canada, the U.K., Germany, Hong Kong and Taiwan). And for our advertisers, we're committed to our two key offerings, Gemini and BrightRoll”

To get all this done, she has to take down employee count. So last quarter saw a decline of 1,200 (headcount is down roughly 22% since last year and 42% since 2012).

Yahoo’s user base is phenomenal; it is one of the largest in the world. But the problem that remains and continues to irk investors is the inability to convert this asset to yield more revenue. This is a function of higher engagement and better targeting of ads. So it was good to note that total page use in the U.S. grew 14% from last quarter and 10% more per user on the Yahoo app (the new Yahoo app launched last quarter may have had something to do with it).

There was also some progress on Tumblr: mobile active users were up 12% sequentially and 35% year over year. The company has redesigned the dashboard, which has resulted in increased engagement on the platform. For advertisers it launched blogless ads and community targeting, both of which should help monetization.

That said, Mavens revenue remains disappointing, although not more than it has been recently, so the company may be able to bring in the $1.8 billion it’s targeting. The business grew 60.2%, 43.1%, 25.9% and 7.4% year over year in the last four quarters and generated $1.66 billion in 2015.

Mobile was a point of strength in the last quarter, growing double-digits from both the previous and year-ago quarters.

Yahoo continues to focus on search pricing, which could be part of the reason for the sharp decline in paid clicks. Mayer promises that RPS continues to increase.

Mayer promised that the management team was taking the sale plans very seriously and focused on operating results for the rest of the call.

The numbers in detail-

Revenue

Yahoo reported GAAP revenue of $1.09 billion, which was down 14.6% sequentially and 11.3% year over year. Traffic acquisition cost (TAC) was down 15.6% sequentially and up 24.4% from last year. Excluding these costs in all periods, net revenue was down 14.4% sequentially and 17.6% year over year, exceeding the Zacks Consensus Estimate by 1.6%.

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

Search revenue (ex-TAC) was down 8.8% sequentially and 19.4% year over year. Key metrics were a huge disappointment in the last quarter, with paid clicks dropping 21% year over year. Management said that both the Microsoft MSFT and Alphabet GOOGL relationships helped in the last quarter and that revenue per search (RPS) has grown 3X ovr the past three years. The price per click (PPC) grew 7%.

Display revenues (ex-TAC) dropped 19.4% sequentially and were flattish compared to the comparable quarter of 2015. The number of ads sold grew 8% from the year-ago quarter with the price per ad (PPA) dropping 6%.

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 $391 million in the last quarter, of which Yahoo paid out $131 million to its revenue sharing partners. Net mobile revenue grew 64.6% sequentially and 11.1% year over year.

Mavens (mobile, video, native, social) dropped 17.4% sequentially although it was still up 7.4% from year-ago levels. Year-over-year revenue growth continues to decelerate, although the revenue share has grown from 30% to 36% during this time.

Other (fees, listings and leads) revenues were down 12.6% sequentially and 42.7% from last year.

Display, Search and Other platforms represented 44%, 40% and 15% of Yahoo’s first-quarter ex-TAC revenue, respectively. All the segments performed below normal seasonality.

By geography: Yahoo generated around 76% of revenue on an ex-TAC basis from the Americas (down 15.1% sequentially and 19.7% from March 2015), around 7% came from the EMEA region (down 16.6% sequentially and 7.2% year over year) and the balance from the Asia/Pacific (down 9.1% sequentially and 11.0% year over year).

Margins

Yahoo generated a gross margin of 53.1% in the last quarter, down 84 bps sequentially and 874 bps year over year.

Total operating expenses of $688.3 million were down 5.6% sequentially and 13.5% from the year-ago quarter. All costs increased sequentially as a percentage of sales but were flat to down from last year.

The net result was an operating margin of -10.3% that was worse than the previous quarter’s -3.4% and the year-ago quarter’s 3.1%.

Net Income

Yahoo’s pro forma net loss was $18.4 million or 1.7% of sales compared to loss of $38.2 million or 3.0% of sales in the previous quarter and profit of $71.4 million or 5.8% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring 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 $99.2 million ($0.10 per share) compared to loss of $4.43 billion ($4.70 per share) in the Dec 2015 quarter and net income of $21.2 million ($0.02 per share) in the March quarter of last year.

Balance Sheet

Yahoo’s cash and short term investments balance was to $5.98 billion at quarter-end, up $119.6 million during the quarter. The company generated $365.8 million of cash from operations of which $76.4 million was spent for capex.

Guidance

Yahoo provided limited guidance for the second quarter of 2016. Accordingly, revenue is expected to be down in line with normal seasonality to $1.05-1.09 billion, TAC $240 million, revenue on an ex-TAC basis $810-850 million, adjusted EBITDA of $135-155 million and non GAAP operating income of -5 million to 15 million. 

2016 estimates weren’t revised at this time.

Recommendation

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

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