Yahoo Japan Records Strong Q3 Results with Positive Outlook for Q4 (YHOO, EWJ)

Includes: AABA, EWJ
by: Steven Towns

Yahoo! Japan Corporation, an affiliate of Yahoo! (YHOO), reported third-quarter earnings and financial results today for the three-month period ended December 31, 2005. It had quite an impressive quarter and maintains a positive outlook for its fourth-quarter. I believe Yahoo! Japan is in a better operating position than Yahoo! because of its diversified sources of income and the on-line advertising business in Japan is just taking off.

Key financial results (percent increase) for the Oct.-Dec. 2005 (Q3) period compared to the same period in 2004.

    • Net sales 51%
    • Cost of sales 90%
    • Gross profit 47%
    • Operating income 33%
    • Quarterly net income 37%
    • EPS adjusted for share splits 37%

Yahoo! Japan's sales breakdown in order by its 5-biggest sales categories, compared to Q2-05 (with overall percentage of sales at the end of Q3-o5 in parentheses).

    • Listing 5.2% (26.8%)
    • Auction 17.3% (20.7%)
    • Shopping 20.7% (11.3%)
    • Media 21.0% (10.8%)
    • Yahoo! BB 2.6% (10.6%)

Yahoo! Japan's ad revenue for the 3rd-quarter increased 71.5% year-over-year and increased 15.4% over the 2nd-quarter.

In advertising sales by industry Yahoo! Japan reported the industries with the largest increases in ad spending were: Computers/Office Equipment, Finance/Insurance/Securities, and Recruitment Services. The industries with the highest growth rate of ad spending were: Information Processing/Software, Computers/Office Equipment, and Mobile Communication Services.

I would like to offer a brief explanation for Yahoo! Japan's 90% increase in cost of sales this quarter compared to same period in 2004. Basically it has been on hiring binge as it rapidly grows and expands its businesses and in a number of cases by acquisition.

Yahoo! Japan (Tokyo Stock Exchange ticker: 4689) had two 1:2 share splits in 2005 raising its total number of shares outstanding to 30.2 million. Its share price remains a lofty 151,000 yen (US$1,313 at an exchange rate of Y115/US$), an after effect of its early days when it traded on the JASDAQ and had few shares outstanding fetching a typically unheard of price as far as U.S. investors are concerned.

Yahoo! Japan is a holding of iShares MSCI Japan Index (EWJ). Its shares were down 5% today ahead of its earnings release and as the Nikkei 225 and TOPIX 1st Section stocks fell by over 2% each. Yahoo! Japan is majority owned by Softbank Corp.

Lastly, in response to questions about the ongoing investigation of livedoor Co. and its president Takafumi Horie, Yahoo! Japan's president Masahiro Inoue responded by showing his admiration of Horie's willingness to face challenges and never give up; however, he also stated the there are rules in society and it would be disappointing if livedoor were found guilty.

Regarding his own firm's compliance and governance, Inoue was assertive that his firm is in a good standing. He had an interesting (yet not surprising) reaction to a question about the concentration of Internet-related firms including livedoor Co., in Roppongi Hills (a state-of-the-art commercial and residential skyscraper and surrounding area located in Roppongi, Tokyo) and the firms collectively being referred to as the "Roppongi Hills tribe." Inoue seemed to be a bit disturbed by the question and was quick to dismiss this as anything more than a coincidence that a bunch of Internet companies were renting/leasing office space in the same building.

For those interested an English version of Yahoo! Japan's analyst meeting will be available shortly here; currently it's only available in Japanese.

Sources: Yahoo! Japan Finance News; Yahoo! Japan

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