- Yahoo reported disappointing Q2 2014 results with an increasing dependency on the company’s stakes in Alibaba and Yahoo Japan.
- Yahoo undertook a series of actions in order to minimize this dependency and close the gap on its competition.
- Yahoo’s short term disappointing results should be followed by long-term upside.
In the middle of June, the Internet giant Yahoo (NASDAQ:YHOO) reported disappointing Q2 2014 results that included a lower than expected EPS of $0.37 which was $0.01 lower than analysts consensus, and $1.04 billion revenues (Ex-TAC) which were below the company’s revenue outlook of $1.08 billion. Revenue figures incorporate a quarter-over-quarter decline in each segment as can be shown in chart 1 below. Yahoo stock price plunged 5.11% in the next day of trading following the quarterly results and an additional 1.7% the day after it. This chain of events could be alarming for the Yahoo investor. However, it could also highlight the change that Yahoo is going through.
After a few years during which Yahoo’s leadership took some wrong business decisions and missed most of the tech trends of the recent years including social media, online streaming and mobile boom, the company’s board appointed Google’s executive Marissa Mayer as president and CEO of Yahoo. Mayer brought with her a wind of change to Yahoo and started the journey to close the gap Yahoo had from its competitors and make Yahoo the relevant and innovative tech company it used to be.
Yahoo’s problem is in its dependency on the stakes it has in Alibaba Group (NYSE:BABA) and Yahoo Japan (OTCPK:YAHOY) as shown in chart 2 below. Chart 2 describes Yahoo’s net income, earnings in equity interests and post-tax profit. Post-tax profit is Yahoo’s income before earnings in equity interests after income taxes and represents the net income that Yahoo would have had if it had not held its stakes in Alibaba and Yahoo Japan. The gap between post tax profit and earnings in equity interests represents Yahoo’s dependency on Alibaba and Yahoo Japan. The bigger the gap, the bigger is Yahoo’s dependency. As shown in chart 2, Yahoo’s post-tax profit decreases quarter-over-quarter while earnings in equity interests increase quarter-over-quarter. In the first half of 2014, Yahoo’s dependency increased, and the vast majority of the company’s net profit originated from earnings in equity interests and not Yahoo.
Increased dependency is driven by a decrease in revenues and an increase in operating expenses. This dependency is the outcome of Yahoo’s past wrong business decisions and their reflection in the financial statements. In order to change its financial situation, Yahoo highlighted four-focus areas that should enable the company to expand its portfolio and close the gap on its competition. These focus areas are mobile, social media, video streaming and online content.
In the mobile area, Yahoo made two main acquisitions to strengthen its presence and increase revenues: Aviate and Flurry. Aviate’s acquisition enabled Yahoo to offer a Yahoo branded home-screen app that contextually organizes apps on an Android phone and highlights information from Yahoo’s mobile services. Scaling this app launcher will enable Yahoo to increase traffic on its mobile apps and services and will attract more advertisers to them. Flurry’s acquisition allows Yahoo to expand its mobile ad sales further and to use Flurry’s broad infrastructure to reach more potential customers. After Flurry’s acquisition, Yahoo should be able to monetize its mobile services not only better, but also to generate more revenues from selling mobile ads in other apps inside Flurry’s network. This move will help to make Yahoo a central player in the mobile ads market, competing with Google, Microsoft and Facebook.
In the social media area, Yahoo acquired the hot microblogging site Tumblr in 2013 for $1.1 billion to support its social media effort that Flickr led until then. The acquisition of Tumblr allowed Yahoo to increase market share in the social media market and become a relevant player in that market.
In the video streaming area, Yahoo closed Yahoo Videos -- its video sharing website where users could upload and share video content and re-launched it as Yahoo Screen, an online streaming service. Yahoo acquired RayV in order to improve its streaming and technological abilities in this area and collaborated with Live Nation to offer live online music concerts from top artists.
In the online content area, Yahoo expanded its digital magazines and brought in industry professionals to lead these magazines. Yahoo also invested in quality content in order to drive more traffic to these magazines and increase revenues from selling ads there.
After a long time spent lagging behind its competition, the company is trying to close that gap and restore its reputation as a leading and innovating tech giant. All the above actions Yahoo made are targeted to leverage its strengths to generate revenues and open new markets for the company to generate additional revenues. Yahoo’s latest disappointing earnings release is part of the process, and I believe that Yahoo’s efforts to release itself from Alibaba and Yahoo Japan's dependency will succeed in the long run. Yahoo’s core operations are well on the path to resurrection!
Amigobulls currently has a buy rating on Yahoo. View Yahoo stock analysis.