Yahoo Q1 2014: Alibaba Surges Past Expectations

  • Yahoo core search and display business saw improvement in fundamentals and operating metrics ending the quarter with a 30% jump in mobile monthly unique visitors.
  • Alibaba delivered a blowout quarter with solid 66% topline growth and over 100% earnings growth.
  • The Alibaba IPO will drive the stock price higher in the short term while a turnaround in the core operations could drive long term potential of the stock.

Yahoo Q1 2014 earnings preview

Yahoo (NASDAQ:YHOO) announced its Q1 2014 results after market close yesterday, April 15th2014. The results were in-line with analyst estimates, with earnings per share marginally ahead of analyst estimates at 38 cents per share. More interesting was the improvement in operating metrics of the core business, which saw solid improvement on a Y/Y basis. Once again, the performance of Alibaba was in focus amid reports of an upcoming IPO. Let’s take a look at the financial performance and operating metrics of Yahoo’s core business before evaluating Alibaba post the latest numbers, which have been released.

Yahoo: Core business poised for a turnaround.

There wasn’t much of a cheer as far as the financial performance of core operations was concerned. Revenues stayed flat in comparison to year ago quarter, even as GAAP operating income was negatively impacted by a surge in stock compensation. The non-GAAP operating Income saw a decline of 33%. However, the impact of declining operating income, on Net Income, was minimal. Net Income was boosted by a 39% Y/Y surge in earnings from equity interests and the continued share repurchase program.  As part of the program, the company bought back close to 12 million shares during the quarter, taking the total repurchase value since the beginning of 2012 to $6 billion. The table below summarizes the financial performance of Yahoo’s core operations.

In millions of $, except per share figures Q1 2013 Q1 2014 Y/Y change
Revenues 1,140.37 1,132.73 -1%
Non-GAAP operating Income 224 149 -33%
GAAP operating Income 185.97 30.18 -84%
Non-GAAP EPS (Earnings per share) 0.38 0.38 0%

The improvement in financial metrics isn't something which is expected to happen immediately, even though the slower decline in revenues is something to cheer about. The search business (9%) and display businesses (2%) delivered Y/Y growth on an ex-TAC (Traffic acquisition costs) basis, even as overall revenue saw a marginal decline. The increase in ex-TAC revenues suggests improved monetization across Yahoo properties. The core operations will see a greater boost with the company’s clear focus on mobile, native, social and video operations. The improving operational metrics, displayed in the table below, are a clear indication of a possible turnaround in the core business.

Y/Y change in metrics Q4 2013 Q1 2014
No of paid clicks 17% 6%
Cost per click -3% 8%
Display ads volume 3% 7%
Price per ad -7% -5%

The slowdown in the number of paid clicks was offset by a significant increase in the cost per click, sending click based search revenue to a Y/Y growth of 14%. The display volume was once again on the rise, and with improved monetization, price per ad can be expected to improve over the coming quarters. Yahoo continued to see a significant rise in the number of mobile monthly unique visitors, ending the quarter with 430 million mobile monthly unique visitors compared to 300 million in Q1 2013. The focus on mobile seems to be paying off.

Yahoo ended the quarter with a strong cash and cash equivalents of $4.6 billion, which is down from $5 billion a quarter ago. However, with the news of an Alibaba IPO doing the rounds, marginal depletion of the cash reserves is hardly a matter of concern. Yahoo could net close to $10 billion after tax from a partial sale of stake in case of Alibaba’s IPO. With the possibility of a cash windfall, the balance sheet looks strong to finance the current acquisition spree at Yahoo Inc.

Let’s now take a look at the performance of Alibaba for the three months ended December 2013.

Alibaba: Slowdown fears have been blown away

Alibaba has for a large part been the black box in the valuation of Yahoo. The latest numbers regarding the performance of the Chinese internet retail/payments giant has blown away any fears of a slowdown that were raised post its September 2013 results. Alibaba saw a 66% topline growth with revenues reaching $3.06 billion for the last three months of 2013. The Net Income growth was even better at 112%, with a 27.8% Y/Y improvement in the Net Income margins.

Q4 2012 Q3 2013 Q4 2013 Q/Q Y/Y
Revenues 1,840 1,776 3,060 72.3% 66.3%
Gross profit 1,348 1,256 2,377 89.3% 76.4%
Net Income 642 801 1364 70.3% 112.4%
Net Income margin 34.9% 45.1% 44.6% -1.2% 27.8%

The news of the blowout quarter couldn't have come at a better time, with reports suggesting Alibaba filing for an US IPO as early as next week.


The value of Alibaba and Yahoo Japan will continue to drive the share price of Yahoo over the short term as the stock currently trades as a proxy for its Asian investments. However, with the improvement in core operations Yahoo is a highly attractive investment for long-term. While double digit topline growth rate is still further away, we believe the worst is behind Yahoo. The improving operational metrics and a solid balance sheet to leverage on, core business is well on the right side of a turnaround. The importance of the improvement in ex-TAC revenues and other operational metrics isn't lost on investor. The combination of improving core operations and solid performance from Alibaba led to a pre-market gain of 9% (at time of writing) in YHOO stock price.

To see the current stock price of Yahoo click here: (NASDAQ:YHOO)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and YHOO stock

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It is ironic that yahoo's core business is almost becoming irrelevant compared to their 24% holding in Alibaba. However a real boost in core business is what will take yahoo back to its past glory days.
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