Seeking Alpha

Here are excerpts from Citigroup analyst Mark Mahaney's note to clients in reaction to Yahoo's earnings last night:

YHOO: Building Out the 2006 Long Thesis

* Yahoo! posted a Modest Beat & In-Line quarter -- $932MM rev./$0.16 recurring GAAP EPS modestly beat Street at $918MM/$0.14, with 1X items adding $0.01 to bottom-line. Dec Q guidance right In-Line with Street.

* Fundies largely improved. Y/Y organic revenue growth decelerated modestly from 41% in June to 40% in September, while EBITDA margins were up 170 bps Y/Y to 41.3%, with 45% incremental margin. FCF conversion improved.

* 2006 GAAP EPS goes from $0.75 to $0.77 ($0.01 due to lower tax rate).

* We are incrementally more +. The co provided much needed clarity on its plans to "fix" its Search business. The 2006 timing is later than expected, but the plans are broader than expected. Meanwhile, Branded advertising continues robust 30%+ Y/Y growth & Fees revenue is strengthening. If search is "fixed," there could be an impressive revenue growth acceleration story. Valuation at 14X 2007 EBITDA or 32X 2007 proforma EPS looks reasonable.

Did YHOO’s fundamentals improve? Yes. Organic Y/Y revenue growth was 40% in the September quarter, a modest deceleration from the 41% Y/Y growth seen in June quarter.

On the margins side, EBITDA margins increased 170 bps Y/Y and decreased 80 bps Q/Q to 41.32%. Y/Y incremental EBITDA margins were 45.3%, indicating the potential for further margin expansion.

Were fundamentals better than the Street expected? Yes. Revenue of $932MM, EBITDA of $385MM, and recurring GAAP EPS of $0.16 were higher than Street expectations for $918MM, $378MM, and $0.14, respectively.

Did the company raise guidance relative to the Street? No. Going into the release, Street consensus for the December quarter was $1,060MM in revenue and $466MM in EBITDA, and the midpoints of the company’s new guidance are $1,057MM and $467MM, respectively.

Source: Sell-Side Reaction to Yahoo's Q3 Earnings 1: Mark Mahaney, Citigroup (YHOO)