Yahoo Earnings Preview: Q2 2013

Jul.12.13 | About: Yahoo! Inc. (YHOO)

By: Todd McDonald, Analyst

Overview

Yahoo! (NASDAQ:YHOO) is scheduled to report 2Q 2013 earnings after the close of trading on Tuesday, July 16. The results are typically released soon after the closing bell and will follow with a conference call at 5:00 p.m. EST. This is another significant quarter for Yahoo! with the company's shares at multi-year highs under CEO Marissa Mayer and the Street eager to learn more about the opportunities facing the company.

Outliers & Strategy

  • Non-GAAP Earnings Per Share: Yahoo! typically reports a value for Non-GAAP EPS that is comparable to consensus estimates. The current Street estimate is $0.30, with the high end of the range at $0.36 (Source: Yahoo! Finance). Given the recent jump in the share price, look for Yahoo! to post earnings closer to $0.34 in order to sustain the advance.
  • Revenues Ex-Traffic Acquisition Costs (TAC): Yahoo! will report a top-line figure that removes traffic acquisition costs that is closely compared with consensus estimates. In last quarter's release, the firm indicated that they expect Revenues Ex-TAC between $1.06 bln and $1.09 bln. The current estimate is at the high end of the guidance range at $1.08 bln with estimates running as high as $1.11 bln.
  • Implied Volatility: For the past eight quarters, the average absolute one day move after earnings are released has been 3.05%. Using options premiums, traders are expecting an absolute move of approximately 4%.

Recent News

  • 07/10: According to a post on StreetInsider.com, Needham & Company reiterated its Buy rating and raised its price target to $31 from $26. The firm believes Yahoo! will benefit from a lower tax rate this quarter.
  • 07/10: Citigroup started coverage on Yahoo! with a price target of $30, according to a post on StreetInsider.com. Analyst Mark May cites multiple catalysts that are near term, including liquidation of Yahoo! Japan, the potential from an Alibaba IPO, and an improvement in Yahoo!'s underlying business. He also cites the modest valuation of 5x EBITDA, calling the name one of the best risk-reward trades in the Internet space.
  • 07/09: According to a StreetInsider.com post, Goldman Sachs reiterated its Buy rating and $30 on Yahoo! The firm cites improvement in revenue per search and continuing cost reductions that will help the bottom line.
  • 05/30: In a post on StreetInsider.com from May 30, Goldman Sachs indicated that Yahoo!'s traffic growth from comScore indicated a positive inflection point. Page views turned positive (an increase of 2.1% y/y) after months of declining traffic.

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Technical Review

Yahoo! shares are up approximately 36% YTD, en route to new all-time highs. Given the recent strength, earnings will be watched closely for signals that the underlying business is seeing some improvement. Should results exceed estimates, look for a breakout to fresh all-time highs, with little resistance in sight. Conversely, initial support is at the 50-Day SMA near $26, followed by strong support at $25. (Chart courtesy of StockCharts.com)

Summary

Yahoo! shares are near a multi-year high in advance of the 2Q earnings release, with the company benefiting from restructuring efforts under the leadership of CEO Marissa Mayer, improving search revenues, the potential benefits of an Alibaba IPO, and the value of its stake in Yahoo! Japan. But with the shares at these levels, earnings will get careful scrutiny for evidence of organic improvements in the core business and proof that turnaround efforts are bearing fruit. Any missteps could prove costly for Yahoo! shares given the recent advance.

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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.