Yahoo: Q4 2013 Earnings Review

Yahoo Q4 2013 earnings review

Yahoo (NASDAQ:YHOO) released its Q4 2013 results yesterday (Jan 28) after market close. The company reported revenues in line with analyst estimates and topped the estimates on the bottom line with an earnings surprise of 21%. The huge earnings beat was overshadowed by something which is beyond Yahoo’s management, Alibaba’s growth. Alibaba has been the golden egg of Yahoo’s many investments. The latest reported numbers of Alibaba raised concerns about the Chinese company slowing down on its topline, denting the investor confidence in after-market trade. Yahoo stock is trading 3.56% down in pre-market trade (at time of writing) after gaining over 4% in the regular trading session yesterday. We review Yahoo's Q4 performance and full year performance.

Yahoo Q4 2013 positives: Growth in users and ad volume

Yahoo’s core business performance was in line with expectations. The company reported a topline decline of 6% over Q4 2012, but saw a sequential increase in sales by 11.2%. The operating margin registered significant improvement over Q3 2013, with a Q4 2013 operating margin of 13.7%. The company also repurchased 6 million shares during the quarter for a total repurchase value of $231 million. The table below summarizes the company’s financial performance in Q4 2013.

Yahoo Q4 2013 Performance

Q4 2012 Q3 2013 Q4 2013 QoQ YoY
Revenues 1,346 1,139 1,266 11.2% -5.9%
Operating Income 190 93 174 87.1% -8.4%
Operating Margin 14.1% 8.2% 13.7% 5.6% -0.4%
Non-GAAP EPS 0.35 0.34 0.46 35.3% 31.4%

The company registered a significant EPS growth of 31.4% on a Y/Y basis. The growth in EPS was mainly on account of the company’s share repurchase program which saw the company’s share count reduce by 12.36% on a Y/Y basis.

On account of acquisitions, investments and share repurchase, Yahoo saw its cash and cash equivalents balance reduce by 18% compared to the balance at the end of Dec 2013. The company ended Q4 2013 with cash and cash equivalents of $ 3.4 billion, and quarterly cash flow from operations of $351 million as against a cash outflow in the Q4 2012. While Yahoo continues to have significant cash and cash equivalents balance, the company needs to turn around its core business in order to justify the huge investments which the company has made over the last 18 months.

However all was not gloomy for the company’s core business. The silver lining among the disappointing numbers was the increase in number of visitors after years of decline. Other positives from the quarter were increase in number of paid clicks and display ad volume. The other operating metrics for the quarter were as follows.

Operating Metrics YoY Change
Number of paid clicks 17%
CPC -3%
Display Ads Volume 3%
Price per Ad -7%

Alibaba: A slowdown?

We now move on to the performance of Alibaba, which delivered yet another quarter of extraordinary growth and huge margins. The performance of Alibaba for Q4 2013 is summarized in the table below.

Alibaba Quarterly Performance

Q3 2012 Q2 2013 Q3 2013 QoQ YoY
Revenues 1,177 1,737 1,776 2.2% 50.9%
Gross Profit 797 1,288 1,256 -2.5% 57.6%
Net Income -246* 717 801 11.7% NA

* There was a one time charge of royalty payment to Yahoo

The company registered a phenomenal topline growth of 51% on a Y/Y basis. However there were concerns as the growth was lower than the 61% growth in Q2 2013 and represented a sequential growth of only 2%. On a positive note the company saw a 3.4% improvement in Net Income margin over Q2 2013, which led to a 12% increase in the Net Income on a Q/Q basis.

The solid quarterly performance completed a year of extraordinary growth at the Chinese company. The table below displays the 2013 numbers for Alibaba in comparison to the full year 2012.

Alibaba Annual performance

2012 2013 YoY
Revenues 4,082.75 6,375.20 65.0%
Gross Profit 2,764.20 4,909.70 77.6%
Net Income 484.4 2,818.6 481.9%
Net Income Margin 11.9%* 41.8% 30.0%

* There was a one time charge of royalty payment to Yahoo

The company delivered a strong year and though there are concerns regarding slowdown in growth, the company is still growing at a rapid pace. The current growth in revenues and profits justifies a premium valuation for Alibaba. In our last coverage of Yahoo, we estimated Alibaba to be valued in the range of $125 billion - $150 billion. We believe that Alibaba’s latest numbers justify our last valuation of the Chinese internet giant.

Conclusion

Yahoo’s Q4 2013 performance was largely in line with estimates. The company’s Q1 2014 guidance of revenues $1.06 billion – $1.1 billion was also in-line with analyst estimates. However the operating margin is expected to take a hit in Q1 2014, which isn’t good news for the company. We think the company will see a turnaround in revenue growth in 2014 as the company’s strategical focus on mobile will pay off. However, the value of Yahoo will continue to be driven by expectations of Alibaba’s growth till the latter’s IPO actually materializes. We reiterate our Yahoo valuation at about $48 per share, and remain bullish on the stock.

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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