Yahoo! Q2 – The long haul.

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Yahoo! has a lot going for it but it will be some time before it shows in the numbers.

  • Yahoo! reported Q2 results that were hindered by weakness in display advertising but rescued by great performance from its Asian associates.
  • Q2 Revenue and adjusted EPS were $1.07bn / $0.35 compared to expectations of $1.08bn and $0.30 respectively.
  • Yahoo Japan and Alibaba contributed $225m to the bottom line up from $180m last year which was somewhat stronger than expected.
  • This helped turnaround the shares which initially fell 3.2% but recovered nicely towards the end of the after-hours session.
  • Guidance was also a little soft with Q3 revenues expected to be $1.06bn-$1.11bn compared to forecasts of $1.12bn.
  • This is a reflection of display advertising where market share is still being ceded and pricing power is weak.
  • The process of turning around Yahoo! is still in its middle stage but there are some encouraging signs that herald a revenue pick-up further down the line.
  • Advertising is all about traffic which in turn comes from having good products that users want to use.
  • Q2 saw YoY traffic growth return to parts of Yahoo! for the first time in a very long time
  • This combined with the substantial improvements that have been made across the portfolio over the last year give me confidence that revenue growth will return.
  • There are four cornerstones to Yahoo!’s return to growth: search, mobile, display and video.
  • Yahoo! has three of these in hand with a decent strategy to address each one.
  • Video is the real problem as the inventory sells out way in advance implying that much more content is needed to boost revenue.
  • This, combined with the fact that Yahoo! Screen is a poor service is why Yahoo! is actively seeking a video related acquisition.
  • Now that Hulu is off the table, Yahoo! badly needs to address this shortcoming in order to properly address the revenue opportunity that video presents in the fixed line.
  • Video is less of an issue in mobile as users spend only 8% of their time on smartphones consuming media.
  • Yahoo! is managing to tread water while it overhauls its strategy to return to growth.
  • In the meantime, the excellent performance of its affiliates is what has really driven the recent rally in the share price.
  • This implies that a recovery in the core business and a move in to mobile all represent upside.
  • Yahoo! remains the most interesting stock to look at in the world of mobile ecosystems although some patience is required.

 

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.