Limited Progress At Yahoo

| About: Yahoo! Inc. (YHOO)

After the market close on Tuesday, Yahoo! (NASDAQ:YHOO) reported Q1 2013 results that provided limited progress at growing the business. The company has been busy updating main products such as the home page and mail yet it hasn't led to expanded revenue, adjusted EBITDA, or operating income.

The consumer internet company continues to struggle in attracting the current generation of internet users focused on social media and attached to Google (NASDAQ:GOOG) search.

Yahoo! though has been able to dramatically increase the earnings per share based partially on the share buyback program and the exclusion of stock based compensation (SBC). Oddly the SBC number wasn't excluded in prior periods unlike other technology stocks. The company shared that engagements had increased on updated products, but clearly those numbers aren't flowing to the top or bottom lines.

Growth In Clicks Not Price-Per-Click

As mentioned, the engagements increased with the number of clicks jumping 16%. Unfortunately, the price-per-click or PPC declined by 7%. Over the last year, the company has shown that expanding the search market isn't helping as any click growth is only leading to flat to down prices. The company suggested on the earnings call that monetization with Microsoft (NASDAQ:MSFT) via Bing still needs improvement.

On top of that problem, display ads remain an issue as the price-per-ad declined for the first time in recent years along with the continued drop in the number of ads.

So the company might see new engagements, but it isn't leading to stronger ad rates. Advertisers aren't as intrigued with advertising with this customer as in the past.

Stalling Earnings

The company has made zero progress in the all important adjusted EBITDA and operating income lines. The operating income actually declined over last year. The company provided the following highlights for Q1 2013:

  • Revenue ex-TAC was virtually flat with last year at $1,074M.
  • Adjusted EBITDA increased only $2M over last year.
  • Non-GAAP operating income was down 3% over last year at $224M.
  • Earnings per share jumped 38% to $0.38 versus the $0.27 reported last year.
  • Display revenue ex-TAC was $402M for the first quarter, an 11% decline compared to $454M last year.
  • Search revenue ex-TAC was $409M for the first quarter of 2013, a 6% increase compared to $384M last year.

These results suggest a company that remains stalled with new products increasing engagement, but not enough to improve monetization rates. The company has made some interesting moves such as the deals for, Alike, and Jybe along with the Burning Love series, but none of these moves appear enough to move the needle on the important metrics.

Soaring Earnings

The apparent big surprise to analysts was the surge in earnings and the change to reporting earnings with the exclusion of stock based compensation. The company adjusted last year earnings up to $0.27 from the $0.24 reported in Q1 2012 to account for this shift The current quarter also includes a $0.03 increase in earnings due to removal of SBC. Analysts though only forecast flat earnings from last year even in the face of a much lower share count.

With operating income actually down, the major benefits that increased EPS were the stock buybacks, lower taxes, and stronger earnings from equity interests. The significant buybacks reduced the share count from 1,226B in Q1 2012 to 1,108B this quarter. This 9.6% reduction in the outstanding shares naturally increased the earnings per share around $0.04, as the earnings would've only been $0.34 with the old share count.

Stock Valuation

The stock has surged over the last 6 months suggesting investors will be disappointed with the weak guidance provided by the company. The strong buyback and solid balance sheet provides for limited downside, but investors expect growth in the operations before pushing the stock even higher.

The stock was up to $24 from a low below $15 back at the start of September last year. With a market cap of over $26B and an enterprise value around $21B, the stock isn't cheap or expensive. The current earnings annualized run rate of around $1.50 - 1.60 leaves the stock trading at around 15x earnings. On an enterprise valuations basis, the stock is even cheaper.

The major wild card to the valuation is the Alibaba stake. Yahoo! retained a 20% stake in the Chinese internet company that plans to launch an IPO in 2014. Topeka Capital Management forecasts a valuation of up to $80B by then suggesting more upside for Yahoo!. The ultimate pricing of that IPO could greatly impact the valuation of this stock though unloading a multi-billion dollar investment could prove problematic.


With the stock down initially, investors clearly expected guidance for higher revenue growth that would lead to an expansion of operating income. With that growth not in the cards, the company remains reliant on growth in equity investments and a reduction of the share count from further stock buybacks.

While CEO Marissa Mayer has been promising growth from new products, the guidance suggests the reality differs greatly from the expectations. With limited progress in the fundamentals, investors might be better taking profits in Yahoo!. The only reason to invest in this stock now is the Alibaba stake that the company can't easily unload no matter the value that might be reached assuming the company even completes the IPO process next year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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