Yahoo Earnings Q3 2015 Preview

  • Yahoo earnings Q3 2015 are expected to be announced next week (Oct 20).
  • Focus is on the Alibaba spin-off and core business progress.
  • Investors are waiting for Yahoo to prove that it has more to offer than its Alibaba stake.
  • Consensus and guidance reflect a YoY decline in revenues Ex-TAC.

Internet giant Yahoo (NASDAQ:YHOO) is expected to report its Q3’15 results next week and attract a lot of attention from the tech industry and financial sector. In the recent weeks, Yahoo has been heavily involved in managing the long-awaited Alibaba (NYSE:BABA) spin-off that is expected to take place during the fourth quarter of 2015. Yahoo plans to spin off its holdings in Alibaba together with its small businesses division into a new publicly traded company named Aabaco. Yahoo is trying to complete this spin-off as a tax-free transaction and has requested for the IRS to provide a preliminary ruling in that matter. However, the IRS’s refusal pulled Yahoo’s stock into a rollercoaster mode and attracted too much attention from the company’s executives until the company officially announced that it is proceeding with the tax-free spin-off based on a piece of Skadden Arps advice.

The developments in the Alibaba spin-off received most of the attention from investors and the financial sector; however, Yahoo also has a lot to prove in its core business performance after the disappointing results of Q2. In Q2, Yahoo reported revenues Ex-TAC of $1.04B, which was $10M below estimates, and $0.16 EPS, which was $0.02 below estimates. Moreover, Yahoo provided a disappointing guidance of $1.02B, which was lower than the consensus analysts’ expectations of $1.07B. On the spending side, Yahoo presented a disappointing 4x increase in Traffic Acquisition Costs YoY to a quarterly amount of $200M, which was expected to grow up to $250M in Q3’15, according to Yahoo’s guidance.

As shown in Chart 1 below, Yahoo’s revenues are declining and this is expected to slow down and start changing course in Q3’15. If a successful tax-free spin-off is Yahoo’s biggest challenge in its non-core business, executing better than expected results with a significant turnaround is Yahoo’s largest challenge within its core business.

YHOO_Chart 1_101415

Yahoo’s stock is currently trading 40% below analysts' average target price of $44, mainly due to the uncertainty around the Alibaba spin-off and the disappointing core business performance. As the company has already addressed the Alibaba spin-off successfully, the second challenge will receive higher importance in the upcoming Yahoo earnings release.

Within the core business, investors will be looking at Yahoo's progress in the search and display ads revenue as well as any positive developments in Yahoo’s mobile and social portfolio. In the non-core business, the Yahoo Japan stake will probably attract attention as in the previous conference call, as investors wonder louder than before if Yahoo’s strategy regarding the Yahoo Japan stake is not clear.

These are Yahoo’s comparable figures to watch in this earnings:

Q315 Guidance Q3’15 Consensus Q314
Revenues $1,250 $1,260 $1,148
Revenues Ex-TAC $1,020 $1,030 $1,094
Adjusted EBITDA $220 N/A $306
Non-GAAP Operating Income $70 N/A $42
EPS N/A $0.17 $0.52

Source: Yahoo IR, Yahoo Finance, WSJ

Conclusion

Yahoo is stepping into the earnings season with its focus on the Alibaba spin-off. However, analysts and investors expect a decent improvement in core businesses regardless of the non-core developments in Alibaba and Yahoo Japan. The market sentiment is negative towards Yahoo after the infamous Barron’s article, the struggle to complete the Alibaba spin-off, and the declining core revenues. Investors are worried that once Alibaba is spun-off, Yahoo’s core business will not generate much revenue nor create value for shareholders. In this earnings event, just before the Alibaba spin-off, Yahoo and CEO Mayer have their biggest test: to prove that the market sentiment is wrong.

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