(YHOO) Yahoo Remains a Strong Buy Post First Quarter

Yahoo (YHOO) reported first-quarter non-GAAP earnings that were up 11.6% sequentially and up 48.7% year-over-year, exceeding the Zacks Consensus Estimate by 10 cents, or 40.0%.

The surprise history is also positive (35.1% in the four preceding quarters).

Yahoo shares plunged 4.2% as investors responded to the decline in the Display business and weak guidance for the second quarter.


Yahoo reported GAAP revenue of $1.14 billion, which was down 15.3% sequentially and 6.6% year over year. TAC costs were down 42.3% sequentially and 49.9% from last year. Excluding these costs in all periods, net revenue was down 12.5% on a sequential basis and 0.8% from last year, 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 22.7% sequentially and 11.4% from the comparable quarter of 2012. Yahoo’s Display initiatives have obviously not yielded results yet, as falling engagement and negative mix impacted volumes and prices.

However, the trend appears positive for volumes, where the rate of decline is going down. It is negative for the price-per-ad, which is on a decline. Management is optimistic about improvements in both engagement and pricing as we move through the year.

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, Yahoo still has much to prove, given the growing success of rivals Google (GOOG) and Facebook (FB).

Search (ex-TAC) was down 4.4% sequentially and up 6.5% year over year. Yahoo is closing down Korea operations and excluding its contribution in the year-ago quarter, revenue would be up 10%. Ad quality improvements, better user experience and new ad products continued to drive click-through rates.

The number of paid clicks jumped 16%, the fourth straight quarter that growth has accelerated. However, the price per click dropped 7%, which Yahoo attributed to a higher mix of affiliate business. The O&O side of the business also grew, albeit at a slower rate. Microsoft’s (MSFT) RPS guarantee expired in the U.S. and Canada at the end of the Mar quarter.

Other (fees, listings and leads) revenues were down 5.7% sequentially and up 7.5% from last year.

Display, Search and Other platforms represented 38%, 38% and 24% of Yahoo’s first quarter revenue, respectively.

Yahoo generated around 75% of revenue on an ex-TAC basis from the Americas (down 11.4% sequentially and up 1.5% from Mar 2012), around 8% came from the EMEA region (down 13.7% sequentially and 5.7% year over year) and the balance from the Asia/Pacific (down 13.9% sequentially and 4.8% year over year).


Yahoo generated a gross margin of 69.8% in the last quarter, down 74 bps sequentially and up 242 bps year over year.

Total operating expenses of $610.0 million were down 7.5% from the previous quarter and up 5.9% from the year-ago quarter. While all expenses increased sequentially as a percentage of sales, S&M increased the most, followed by product development and G&A. However, while product development and G&A expenses also increased from last year, S&M declined.

The net result was an operating margin of 16.3% that shrank 526 bps sequentially while expanding 200 bps from the year-ago quarter.

Net Income

Yahoo’s pro forma net income was $391.2 million or 34.3% of sales compared to $369.6 million or 27.5% of sales in the previous quarter and $291.1 million or 23.8% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring reversals in the last quarter.

Including the special item and the amount given out to non-controlling interests, Yahoo’s GAAP net income was $397.1 million ($0.36 per share) compared to $280.2 million ($0.24 per share) in the Dec 2012 quarter and net income of $286.3 million ($0.23 per share) in the Mar quarter of last year.

Balance Sheet

Yahoo has a solid balance sheet, with cash and short term investments of $3.0 billion, which was however down $1.2 billion during the quarter. The company generated $297 million from operations in the last quarter and spent $109.8 million on capex and $70.5 million on share repurchases in the last quarter. Yahoo does not have any debt.


Yahoo provided limited guidance for the second quarter of 2013 and updated its guidance for the full year. Accordingly revenue for the current quarter is expected to be $1.06-1.09 billion, with adjusted EBITDA of $350-370 million and operating income of $190-210 million.

For the full year, Yahoo expects revenue of $4.5-4.6 billion (reiterated), with EBITDA of $1.6-1.7 billion (reiterated) and operating income of $1.05-1.10 billion (up from $810-850 million).

To Conclude

Yahoo’s search business continues to show signs of improvement, despite softer pricing. Improvements on the display side are ongoing, although the impact is not apparent just yet.

While the guidance was disappointing, ad improvements, technology enhancements and cost control are positives. Yahoo’s guidance indicates a 7.4% increase in operating income on a revenue decline of 5.7%, which is indicative of solid cost control.

Yahoo shares have appreciated 47.9% over the last six months, after the Alibaba issue was resolved, the company started retreating from unprofitable markets and acquiring companies to build its position in mobile.

Yahoo shares currently have a Zacks Rank #1 (Strong Buy).
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