- Yahoo reported very disappointing results in its core business, with an 8% YoY revenue ex-TAC decline.
- The Aabaco spin-off is expected at the beginning of 2016.
- Shareholders lost faith in management's ability to turn the company around, and the stock is down by 35% YTD.
Internet giant Yahoo (NASDAQ:YHOO) reported its Q3’15 earnings this week (October 20), with lower than expected revenues and EPS results followed by a lower than expected Q4’15 guidance. In earlier article before Yahoo’s earnings conference call, I highlighted that investors are looking for core business figures in anticipation of the company proving that it had more to offer than the Alibaba (NYSE:BABA) stake. However, in its earnings results and during the conference call, Yahoo proved the opposite: It has nothing to offer its shareholders other than the Alibaba stake and a tax-free spin-off into Aabaco.
Core Business Continues To Decline
Let’s start with the core business. Yahoo reported declining revenue ex-TAC figures across the board, which include a 13% YoY decline in search revenues, a 16% YoY decline in other revenues, and a modest percentage growth in display revenues. That small increase in display revenues didn’t prevent Yahoo’s total revenues ex-TAC to drop YoY by 8% as shown in the table below.
The core business geographic segment data reveals an even more disappointing picture - Yahoo’s revenues Ex-TAC dropped YoY in all geo segments: the Americas dropped 5 percent, EMEA by 18 percent, and Asia Pacific by 18 percent. If that wasn’t enough, the company announced that it is closing down its video content business and writing off $42M worth of assets. CFO Goldman commented on that by saying, “We thought long and hard about it, and what we concluded is certain of our original video content. We couldn't see our way to make money over time.” Even though the write-off amount is not massive, Yahoo is quietly shutting down a service it was so proud of last year. When it started, it made a lot of buzz with Community and Sin City and now closed the business because Yahoo can’t see how to make money out of it. This makes investors feel uncomfortable with the management skills to steer this ship out of trouble.
The Abaco Spin-off
A significant portion of the conference call was about the Aabaco spin-off. CEO Mayer mentioned firmly that the spin-off will be backed by the Skadden Arps tax advisory covered in an earlier article. The spin-off will occur in January 2016, which is later than the Q4 2015 time frame that Yahoo provided earlier; however, the when-issued trading might open in late December.The spin-off might be an exciting event for many investors. However, Yahoo proved in these earnings that it has very little to offer beyond its Alibaba stake. Once the Aabaco spin-off is complete, Yahoo’s main assets will become Yahoo Japan and its significant holdings in the Hadoop company Hortonworks (NASDAQ:HDP). The lack of significant, organic money-generating business concerns Yahoo’s investors, and its stock price continued to fall with another 5 percent drop completing a 35 percent decline YTD, as shown below.
Yahoo earnings for Q3 2015 came out very disappointing with revenues ex-TAC below estimates and below company’s guidance, falling 8 percent year-over-year. The company reported YoY declines in all geographies and most operating segments. Yahoo’s Aabaco spin-off was slightly pushed to the beginning of 2016 and will take place backed by Skadden’s tax advice.
Yahoo disappointed investors by presenting a declining core business result at a time when investors are worried about the post-Aabaco era. For now, I see value in Yahoo’s stock only related to the Aabaco spin-off and Yahoo Japan stake. Yahoo’s management proved it experiences serious difficulties in achieving a turnaround in the company’s performance. Investors not interested in the Aabaco spin-off might want to halt before leaping into an investment.