Yahoo Q3 2014 Earnings Preview

  • Yahoo is set to announce its third quarter earnings on October 21, 2014.
  • Yahoo has made a string of acquisitions in the current quarter.
  • Search and display business to power Yahoo’s future growth.


Yahoo (YHOO) is scheduled to report its third quarter financial results on October 21st. Yahoo had a disappointing second quarter with revenues shrinking by 4% to $1.08 billion. Following a series of acquisitions and the blockbuster Alibaba IPO, the focus is back on Yahoo’s core business. Yahoo’s future growth lies in the growth of its core advertising business.

The Quarter in Perspective

The current quarter has been an eventful one for Yahoo. The company sold 140 million shares in Alibaba IPO at $68 resulting in a cash inflow of $9.52 billion. This provides Yahoo with an after tax cash chest of $5.1 billion. There has been much speculation about Yahoo’s plans of using the cash. Yahoo continued its share buyback program and also continued its shopping spree through the quarter.

The company made a big ticket acquisition of Flurry, a mobile analytics company in July. Recently on October 4th it acquired MessageMe, a messaging app for $30 to $40 million. The acquisitions made by Yahoo have been more for acquiring talent than for business expansion. Most of its acquisitions are being shut down. Yahoo is closing down MessageMe in November while retaining employees. They will be deployed to work on a messenger app which Yahoo is building internally. At the same time Yahoo has announced its plans for cutting 400 jobs from its Bangalore office. The company is changing the way it does business.

Performance of the core business

While there was good news for the company from its investments in Alibaba and Yahoo! Japan, Yahoo’s core advertising business has not grown in past two years. Its revenue and EPS has stagnated. This has led to many analysts questioning CEO Marissa Meyer’s turnaround strategy. There have been calls for merging Yahoo with AOL. Yahoo has two main sources of advertising revenues, search business (41%) and display business (38%). While there has been consistent growth in search revenue, display revenues have declined.

Source: Yahoo

In search business both total number of ads and price per ad have improved. But in case of display business there was increase in total number of ads sold while price per ad declined. A study by eMarketer forecasts a decline in Yahoo’s share of US digital Ad revenue spend.

Source: Marketrealist

However, as we have noted in our earlier post, Yahoo has launched a series of digital magazines to build premium content which will attract premium advertisers. This will boost the revenues from display business. While reports suggest that Yahoo’s strategy might be working, Yahoo has a long way to go.

Earnings history and Q3 2014 analyst estimates

Analysts estimate Yahoo’s Q3 EPS to be $0.3 on a revenue of $1.04 billion. Q2 revenue declined by 3.4% from previous year, according to data compiled by Yahoo finance.
Source: Yahoo finance

Analyst’s revenue estimate is lower than Yahoo’s guidance range of $1.06 to $1.1 billion. Yahoo has delivered positive earnings surprise in three of the last four quarters. Can it beat the estimates again? For detailed analysis, see our Yahoo video review.

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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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