- Display and Search revenue was weak, but there were a few bright spots.
- Yahoo's investment in premium content is commanding a higher PPC.
- Yahoo seems willing to reduce share count with some of the Alibaba IPO proceeds.
Yahoo (NASDAQ:YHOO) had been a Wall Street darling leading up to the Alibaba IPO, but investors are now left scratching their heads wondering if growth is slowing. This quarter Yahoo hit a two-foot speed bump as display advertising declined. Competitors like Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) have not experienced this problem yet. Even though last quarter was disappointing, there are three issues that investors could get excited about.
Price per click increased by 15% -- let's take a look at the problem
Yahoo reported revenue and earnings that fell short of what analysts had been expecting. Revenue of $1.04 billion was lighter than $1.08 billion that analysts projected and earnings of $0.37 were a penny shy of the $0.38 consensus. The shortfall was in both display advertising and search, which missed by 7% and 6%, respectively. This is more than just a bit outside of expectations, but the company is developing new sources of advertising and that does take time.
Despite the revenue shortfall, one of the key highlights was a double-digit increase in price per click. PPC rose 15% from the prior year as the company gets more of its traffic from Yahoo-owned properties. As the recent investments in developing sites and content like Yahoo Movies and Yahoo Travel are more widely used, higher priced advertising could rapidly restore revenue growth.
New apps bundle traditional and new services
In the most recent quarter, a new version of the mobile mail app has incorporated Yahoo's new magazines: Food, Tech, Travel, Movies, and Beauty. This seems like a good way to get the new content in front of existing Yahoo mail users and increase the profile of its web services. We are at the early stages of integrated content, but Yahoo's wide variety of services and vast number of email accounts could allow the company to offer premium priced and relevant advertising across numerous services.
Management committed to giving IPO proceeds back to shareholders
Alibaba's IPO is expected to come in August, at which time Yahoo will sell 140 million shares. Taxes will claim a large chunk of the proceeds, but the company announced that half of the after tax profits will be returned to investors. The company didn't go so far as to say whether "returned to investors" meant a one-time dividend, a massive share buyback or a combination of the two, but I'm keeping my fingers crossed that it will be a buyback.
Yahoo's share count is just too high
Yahoo has just over 1 billion shares of stock outstanding. That's a massive number. In order for the company to earn $0.01 of EPS, it has to make $10,000,000 of profit. This is a structural problem that the current management team inherited, but one that can be fixed (at least partially) with the windfall from the Alibaba IPO.
Google has a more manageable model, but Facebook may fall into the same trap
Google has 15 times the revenue and 1/3 less the shares compared to Yahoo. The smaller share count has been a big factor in its rapid earnings growth when combined with strong revenue growth. Facebook, on the other hand, may be falling into the same share count trap that Yahoo is digging itself out of. In the March quarter, Facebook reported $2.5 billion in revenue (2.5x Yahoo) but it also had 2.6 billion shares outstanding. If Facebook's 72% year-over-year growth rate is sustainable, it will grow itself out of this problem. But if growth slows or more large acquisitions occur, Facebook's EPS will stagnate the way that Yahoo's has.
If Yahoo can maintain its premium ad pricing on high-profile services while increasing their visibility, revenue growth can get back on track as we enter the back to school and then Christmas season. Combine this increased revenue with a lower share count if the Alibaba proceeds are used for a large buyback, and it's easy to see how earnings growth could re-accelerate. This is a possibility today rather than a probability, but that's how turnarounds begin.
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