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Yahoo! Inc's (YHOO) third quarter earnings comprehensively beat analyst estimates. The company announced distribution of more than $3.1 per share to investors and reported a 50% YoY earnings increase. The improvement in CPC and cheap valuations (forward P/E of 14x) make us bullish on YHOO.

3Q2012:

Yahoo reported its 3rd quarter earnings yesterday. The market was expecting EPS of $0.26 and revenues of $1.08 billion. The company beat both revenue and earnings expectations, resulting in a 5% hike in the stock price in aftermarket trading. Earnings for the current quarter were reported at $2.64 on GAAP basis, showing a major increase in 3Q2011 EPS of $0.23. However, this includes the impact of a $2.8 billion gain on the sale of Alibaba shares (net $16 million restructuring charges). If we exclude these gains, the EPS amounts to $0.35; still beating consensus estimates by 35%.

The EPS improved YoY by 50%; over 3Q2011 earnings per share of $0.23. There was a 1% decrease in GAAP revenues, but a 1% increase in non-GAAP revenues. The non-GAAP income from operations was up 14% as compared to the same period last year. Display revenue for Yahoo was flat as compared to the same period last quarter at $452 million. On a GAAP basis, the display revenue was up 1% at $506 million. Search revenues ex-TAC was $414 million, showing an 11% increase over 3Q2011 figures of $374 million.

However, if we compare them on a GAAP basis, the increase shrinks down to 1%. The Olympics campaign was an important factor behind the increase in display revenues. This significant increase in revenue was driven by a much better click yield and CPC (cost per click). According to company disclosures, the London Olympics had approximately 3 billion page views, which were more than the Vancouver and Beijing events combined.

Share Repurchase:

According to company disclosures, it has closed the initial stages of its share repurchase agreement with Alibaba. This has resulted in Yahoo receiving pre-tax proceeds of $7.6 billion. Approximately $800 million of this amount has been paid in the form of preferred dividends. The company plans to return 85% of the $4.3 billion after tax figures to shareholders. Approximately $646 million has already been returned to shareholders through a share repurchase program.

Conclusion:

CPC for the world's largest online advertisement website Google (GOOG) declined by 15% this quarter. In this tough time, Yahoo has managed to increase its CPC and click yield. This has resulted in a 52% increase in earnings YoY. The company plans to distribute more than $4.3 billion to shareholders; excluding the $646 million already distributed, this comes down to $3.1 per share (20% of current price). The stock is currently trading at 14x its 2012 and 2013 earnings.

Competitors such as Google and Facebook (FB) are trading at forward P/E multiples of 18x and 47x, respectively. The cheap valuations, combined with the distribution of $3.1 per share to shareholders, make us bullish on Yahoo. The company is headed in the right direction with a focus on mobile strategy and focus on website aesthetic improvement. Due to a combination of these factors, we are giving a buy rating on YHOO.

Source: Does Earnings Beat Make Yahoo A Buy?