Yahoo Q3 2014 Earnings Review

  • Yahoo posted earnings of 52 cents a share on revenue of $1.09 billion, handsomely beating the analysts estimate on both top and bottom line.
  • New investments like mobile advertisement business have experienced a strong growth.
  • Yahoo’s core advertising business remains a concern with display revenue declining by 6% on YoY basis.
  • yahoo_Q32014_logo

    Yahoo (YHOO) announced its Q3 2014 earnings yesterday after the market close. Helped by rising revenues from search and mobile business, the company reported a top line and bottom line growth which was higher than analyst’s expectation. Yahoo’s shares rose 3% in after-hours trading to $41.40.

    Yahoo posted earnings of 52 cents a share on revenue of $1.09 billion, against analysts’ expectation of 30 cents on revenue of $1.04 billion. Yahoos’ revenues increased by 1% on a YoY basis from $1.08 billion in Q3 2013, stemming a declining trend in revenues.

    Source: Yahoo

    Yahoo’s EPS of 52 cents a share was 73.3% higher than analysts estimate. A part of increase in EPS was contributed by aggressive share buyback by Yahoo. Yahoo purchased around 31.5 million shares in the current quarter. Through buyback Yahoo is trying to return cash to its shareholders. Yahoos’ cash pile rose to $12.25 billion from $4.31 billion in previous quarter, due to $9.4 billion pre-tax inflow from stake sale in Alibaba IPO. Yahoo has delivered positive earnings surprise in three of the last four quarters.

    Source: Yahoo Finance

    Core advertising business remains Sluggish

    The search business which contributed 41% of Yahoo’s ex-TAC revenue, up from 39% in Q3 2014, grew at 6% on YoY basis to $450 million from $426 million in Q3 2014. Increase in search revenue was due to 17% increase in price-per-click (PPC). This is a good news for Yahoo as increase in PPC shows improvement in quality of Yahoo’s search advertisement platform. However Yahoo's display business which contributed 36% of ex-TAC revenue, down from 39% in Q3 2014, continued to decline. Revenues from display business stood at $396 million, down 6% from $421 million in Q3 2014. The decline in display revenues was mainly due to decline in price per ad. While the total number of ads increased by 24%, the price per ad declined by 24%.

    Source: Yahoo

    The non-GAAP operating income for the quarter declined to $156million from $194 million in the same period a year ago. While cash flow from operations increased marginally from $288 million a year ago to $289 million in this quarter, there was decline in free cash flow.

    Mobile Advertisement

    For the first time the company revealed its revenue from mobile advertisement. Revenues from mobile ad totaled $200 million, approximately contributing 17% of Yahoo’s revenue. Yahoo is expecting more than $1.2 billion in revenues from mobile ad during 2014. Yahoo completed the acquisition of Flurry, a mobile data analytics company that optimizes mobile experiences for developers, marketers, and consumers.

    Marissa Mayer, CEO of Yahoo, stated that she hopes revenue from mobile ads will eventually exceed what it makes from desktop ads. She also said that revenues from mobile ads doubled from the same period a year ago. Yahoo has invested heavily in mobile business and its investments are bearing fruit. Yahoo is bit late in mobile advertising business with Twitter, Google and Facebook already dominating the mobile ads segment.

    In her earnings call Ms. Mayer said that Yahoo is working with tax experts to chalk out a tax efficient plan for reducing tax liability arising out of future stake sales in Alibaba and Yahoo Japan. Yahoo had to pay billions of dollars in taxes on capital gains arising out of stake sale in Alibaba IPO.

    Q4 2014 Earnings Guidance

    Yahoo has given Q4 2014 GAAP revenue guidance of $1.2-$1.24 billion which is higher than analysts’ estimate of $1.17 billion. Ex-TAC revenue is likely to remain within $1.14-$1.18 billion. The company has given Non-GAAP operating earnings guidance of $190-$230 million which is higher than $156 million earned in Q3 2014 but much lower than $330 million earned in Q4 2013.


    Strong performance by Yahoo in Q3 2014 has warded of critics as of now. However sluggishness in core business remains a concern for investors. A strong show in next quarter will go a long way in convincing critics. Yahoo is still undervalued to on a sum of parts basis.

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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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