- Yahoo stock is down slightly despite the company posting a huge ex-TAC revenue decline in its Q4 2015 earnings.
- Yahoo's revenue decline can be attributed to a huge increase in the company's traffic acquisition costs.
- Yahoo's management hinted at a possible sale/spinoff during the earnings call.
- Yahoo stock remains a good speculative play on the basis of the stock being massively undervalued.
Yahoo stock was down a rather light 1.6% in aftermarket trading despite the company posting mixed Q4 2015 results including a huge ex-TAC revenue decline. Yahoo (NASDAQ:YHOO) reported Q4 revenue ex-TAC (Traffic Acquisition Costs) of $1B, a huge 15% Y/Y drop. In my Yahoo earnings Q4 preview, I had indicated that Yahoo stock bears limited downside at this point even in the event of a bad quarterly report since most investor attention is currently focused on the possible sale of all or part of Yahoo’s assets.
Meanwhile, Yahoo’s Non-GAAP EPS of $0.13 represented a huge 56.7% plunge but was in-line with the consensus on Wall Street. On a GAAP basis, Yahoo reported revenue of $1,273M, a small 1.6% Y/Y increase. GAAP EPS clocked in at ($4.70), a massive drop of more than 2,800% compared with Q4 2014 GAAP EPS of $0.17. The huge loss was brought about by a colossal $4.461B goodwill impairment charge that Yahoo took on the revised carrying values for some of its businesses and international reporting units including Tumblr, Europe, Canada, the U.S., and Latin America.
Yahoo charged the entire amount during the fourth quarter and said its decision to take the impairment charge was based on lower projected earnings in the business units as well as a falling market cap. Yahoo famously bought microblogging site Tumblr for $1.1B in 2013 but has been unable to keep up with the likes of Twitter (NYSE:TWTR), Instagram, and Pinterest. Analysts see Yahoo’s failure to fully integrate Tumblr with its core brand as being partly responsible for the site’s failure in gaining any meaningful traction under the company. Yahoo has, as a result, remained little more than a holding company for Tumblr.
Yahoo’s huge revenue decline was orchestrated by a huge 266% Y/Y increase in TAC to $271M during last quarter compared to $71M during the previous year’s comparable quarter. For the full year, Yahoo’s TAC more than quadrupled to $878M from $218M during 2014. Yahoo’s ballooning TAC has been caused by the company’s recent search deals, including one it inked with Mozilla in late 2014; its renewed search deal with Microsoft (NASDAQ:MSFT) Bing, its mobile syndication deal, and its BrightRoll program. Yahoo bought BrightRoll, a company that sells automated video ads, in 2014 for $640M in a bid to grow its display search revenue. About 72% of Yahoo’s revenue is traffic driven. The fact that the company is increasingly relying on its partners to drive traffic to its sites means that Yahoo’s TAC is likely to keep growing, and in the process keep pressuring its bottom line.
Yahoo has been counting on Mavens (mobile, video, native advertising and social) to pull the company out of its revenue tailspin. Mavens happens to be one of Yahoo’s few bright spots and one of the company’s few revenue segments that are still growing. Mavens brought in revenue of $472M during the fourth quarter, a healthy 26% Y/Y growth. Mavens contributed 37% to Yahoo’s top line during the fourth quarter and 33% in 2015 up from ~30% in 2014. The rapid growth of this segment will help to partly offset some of the weaknesses Yahoo is experiencing in its core search business.
Yahoo announced that it will lay off about 1,700 workers, or ~15% of its workforce, during the current quarter and shut offices in Mexico City, Dubai, Milan, Madrid, and Buenos Aires. The announcement of the massive layoffs was hardly surprising seeing how the company’s bottom line has continued to suffer even as its costs have continued to grow. Meanwhile, Yahoo’s top line is yet to start growing at a more respectable clip, even though in the company’s defense it has stopped declining in double-digits the way it did a couple of years back.
Yahoo Hints at a Sale
Yahoo chief executive finally made some encouraging comments that most Yahoo investors have been waiting for: that Yahoo was exploring the sale of all or part of its assets. Marissa said that Yahoo was ‘‘exploring strategic alternatives’’ without elaborating further though she did add that:
“Yahoo cannot win the hearts and minds of users and advertisers with a complicated portfolio of products and assets, especially if some no longer meet our aggressive growth goals or distract from growth products.”
Perhaps it’s this announcement by Marissa that helped to salvage Yahoo stock after the earnings call because under ordinary circumstances Yahoo stock would have undergone a shellacking after the huge revenue decline. Barron’s recently succinctly worked out that Yahoo stock can gain at least 35% in the event the company either decides to spinoff Alibaba (NYSE:BABA) stake or sell itself, even assuming the IRS slaps the company with a huge tax bill.
At this point, Yahoo shareholders are counting on the company announcing a sale/ spinoff sooner rather than later. But several industry experts have warned that such a deal could take more than a year before it materializes. Although Yahoo’s business might take a few more years before it can fully return to life. Yahoo stock still remains a pretty good speculative play based on the massive undervaluation of the shares.