Does Earnings Beat Make Yahoo A Buy?

| About: Altaba, Inc. (AABA)
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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.


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.


CPC for the world's largest online advertisement website Google (NASDAQ: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 (NASDAQ: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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Technology Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.