Core Business Sale Will Be The Focus Of Yahoo Q1 2016 Earnings

  • Yahoo will report its Q1 2016 earnings results next week (April 19).
  • The main focus will be on the core business sale.
  • Analysts have low expectations for revenue and EPS figures.

The internet giant Yahoo (NASDAQ:YHOO) is expected to report its first quarter earnings results next week on April 19, only one day after the final deadline to bid for the company’s assets. Yahoo has attracted a lot of attention from market participants since the time it initially announced its desire to spin-off its Alibaba (NYSE:BABA) stake into a new publicly traded company. This plan was halted as the company was concerned that such a spin-off could not fit the tax-free spin-off requirements and would drive a high cost for Yahoo and its shareholders.

As Yahoo struggled to find the best path to turn the company around, activist hedge fund Starboard Value pushed the company to change course, admit the failure, and start selling valuable assets to unlock shareholders' value. In February, Yahoo started the bidding process for its core business, Asian assets, and patent portfolio that, according to different estimations, could have a possible total asset value higher than the current value of Yahoo. The list of companies that bid for Yahoo or are interested in bidding for Yahoo increases every day as many tech companies, media companies, and private equity firms were mentioned as potential bidders. Yahoo bidders are split into three groups: tech companies interested in the patent portfolio or some technological assets like search, mail, etc.; media companies interested in Yahoo’s content business, like Yahoo Sports, News, Finance, etc; or private equity firms that believe they could re-sell the company for a higher price in the future.

Amid the recent developments in Yahoo and the frequent discussion of a sale or spin-off, Yahoo’s stock is currently trading not based on its fundamental value and business performance but on the potential value that shareholders could gain from selling pieces of the company to different buyers. This rationale explains why a company with a less than impressive revenue trend, a long list of operational failures, no growth prospects and that doesn't pay any dividends has rallied almost 35% in the last two months.

YHOO_Chart 5_041416

Even though Yahoo is in the middle of selling its core business, investors should not ignore the operating results entirely in the upcoming earnings release. The company is still working to improve its results as there is no sale ahead of it. In February, Yahoo announced that it will cut 15% of its workforce when it closes down digital magazines and other declining online businesses like Yahoo Video and Yahoo Games. Furthermore, in March, Yahoo started to stream live NHL and MLB matches to build a robust live sports video offering that strengthens Yahoo Sports positioning and makes it a significant asset for Yahoo. Meanwhile, Yahoo continues to develop its other core business areas like Mail, Messenger, Search, News, and Finance. These core business results will help market participants estimate the most updated value of the business and decide whether the bids the company received value it above or below the company’s fair value.

On top of the prominent web assets mentioned above, Yahoo is also selling its extensive patent portfolio, real estate properties, and advertising network. It will be interesting to see what information will be provided by CEO Mayer about developments in selling these assets. CFO Goldman mentioned in March that the total proceeds for the company’s patent portfolio and real estate properties could range between $1B and $3B. Investors should pay attention as to whether Yahoo is able to sell these assets separate from its web assets and how much the company receives for these assets.

As shown in the chart above, analysts expect that Yahoo will report a significant year-over-year decrease in revenues, estimated at 12%, compared to Q1 2015. At the bottom line, analysts expect a 50% drop in EPS YoY from $0.15 in Q1 2015 to $0.075 in Q1 2016.

Analysts’ expectations for Yahoo are reasonable considering the declining trend for Yahoo’s business and reflect the substantial YoY drop in key elements that also include, on top of revenues and EPS, mentioned above, EBITDA, ROA, and ROE. Although the main focus in the upcoming earnings results is on core business sales, investors will keep an eye on core business performance, and failure to meet the low bar that analysts set for the company will have a short-term impact on the company’s stock price.

These are the comparable figures to watch in Yahoo Q1 2016 earnings:

Q1 2015 Actual Q1 2016 Consensus
Revenue $1.225B $1.076B
EPS 0.15 0.075

Source: Thomson Reuters

In the long term, investors should pay careful attention to any development regarding asset sales and any core business progress that might impact the final bidding price.

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I absolutely learned nothing from here; who does not know that Yahoo's core business sale will be the focus of earnings call?
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