After a huge rally in recent years, shares of Yahoo (NASDAQ:YHOO) have basically moved sideways in the last six months, as seen in the chart below. The main culprit has been poor results, as the company has struggled to grow revenues. Share buybacks have reduced the share count, but investors continue to wait for the Alibaba sale. Today, I'll detail why Yahoo is reaching a critical junction.
(Source: Yahoo! Finance)
Continued poor results:
A little over a month ago, Yahoo reported second quarter results. Both revenues and non-GAAP earnings missed analyst estimates. Revenues excluding traffic acquisition costs were down about 2.9% over the prior year period. Non-GAAP EPS came in at $0.37, up two cents from Q2 2013. GAAP EPS dropped 4 cents to $0.26. Both of those bottom line numbers were helped by a 7.3% decline in the diluted share count over the prior year period. Without the buyback, which I'll cover in more detail later, Yahoo's results would have looked even worse.
Some of the internal numbers were even worse, as detailed by some of Seeking Alpha's market currents:
- After growing 2% Y/Y in Q1 (its first quarter of positive growth in some time), Yahoo's display ad revenue (ex-TAC) fell 7% in Q2 to $394M. A 24% drop in ad prices (hurt by mobile?) more than offset a 24% increase in ads sold.
- The display weakness comes as eMarketer forecasts Yahoo's share of global digital ad spend will fall to 2.52% in 2014 from 2.86% in 2013 and 3.36% in 2012.
Unfortunately for Yahoo, analysts don't see things getting too much better in either Q3 or Q4. Revenues are forecast to decline by 3.5% in Q3 over the prior year period. While Q4 is expected to show improvement, a decline of 2.7% is still expected. Estimates look even worse on the earnings side. Analysts are calling for $0.31 in Q3, down three cents from the prior year period. However, Q4 is expected to see EPS of $0.34, down from $0.46 in the year ago period. Even though analysts are forecasting a rebound in revenues during 2015, EPS are expected to fall another dime next year after a dime decline that is forecast for this year.
A looming cash infusion:
Yahoo is about to get a large cash boost once the Alibaba (Pending:BABA) IPO occurs. However, the two companies did agree to a change in their agreement, as detailed below from the second quarter earnings press release. The following statement also includes a discussion of Yahoo's intentions for the funds.
We are pleased to announce today that we have entered into an amendment to the share repurchase agreement with Alibaba, reducing the number of shares that Yahoo is required to sell at the IPO from 208 million shares to 140 million shares. In addition, we are aware that there has been much discussion around the allocation of the Alibaba IPO proceeds, said Ken Goldman, CFO of Yahoo. We would like to take this opportunity to let our investors know that we are committed to return at least half of the after-tax IPO proceeds to shareholders, in line with our overarching commitment to maximizing shareholder value through prudent capital allocation.
Yahoo has already returned a large amount of cash to shareholders through the buyback, so you can expect this to continue even faster after the Alibaba IPO. As you can see in the chart below, Yahoo has seen a large drop in its outstanding share count in the past two years. You can view all of Yahoo's financial filings here.
I mentioned above the huge drop in the diluted share count which helped the EPS numbers for the second quarter. A significant reduction in the share count in recent years is one reason why shares have rallied a bit. Additionally, investors have bought Yahoo for its Alibaba stake. However, one must wonder if Yahoo would have been better served with a few more acquisitions instead. Would shares be even higher if Yahoo were reporting revenue growth now instead of declines?
Yahoo is approaching a critical time, as it is about to receive a huge windfall from the Alibaba IPO. The company will return a large amount of cash to shareholders, and one can expect the company to continue its buyback which has done a nice job of reducing the outstanding share count. However, Yahoo's results have been a bit soft lately, as revenues are declining and analysts are calling for a big drop in second half earnings. I still believe Yahoo goes higher as the Alibaba fever heats up. As we've seen with Apple (NASDAQ:AAPL), a large buyback can really get investors bullish. But for Yahoo to rally even more, the company does need to get its growth story back on track, so look for Yahoo to use some of its windfall for that purpose as well.
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