- Yahoo beats earning estimate while marginally missing the revenue estimate.
- Yahoo’s core revenue from display and search stagnates, while revenue from mobile continues to grow.
- Yahoo to spin-off all of its Alibaba shares in a tax free transaction into an investment company.
Yahoo (NASDAQ:YHOO) released its Q4 2014 earnings, after market hours on 27th January. The company managed to beat the analyst estimates on earnings while marginally missing on revenue. However the main highlight of the release was Yahoo’s plans to spin-off its entire stake in Alibaba into a separate investment holding company, which managed to hide the company’s not so great numbers. Yahoo stock price was up 6.7% in after-market hours.
Yahoo reported EPS of $0.3 on a revenue of $1.18 billion against Wall Street estimate of $0.29 EPS on revenue of $1.19 billion. The EPS beat was partially helped by the fact that Yahoo bought back around 22 million of its shares in the quarter. Yahoo’s core business continued to remain sluggish with ex-TAC (Traffic Acquisition Costs) revenues from display business declining 5% on Y-o-Y basis while revenues from search business remaining flat. Decline in display business was mainly due to declining PC display advertising market.
The total number of ads sold increased by 20% while price per ad declined. In search business, both the number of clicks as well as price per click grew, leading to a growth of 18% in search click driven revenues. However increase in traffic acquisition cost resulted in flat performance of search segment.
The main highlight of Yahoo earnings release was Yahoo’s plans to spin-off its entire stake in Alibaba (NYSE:BABA) into a separate investment holding company. The shares of the new holding company will be allotted to shareholders on a pro-rata basis. Many analysts and activist investors including Starboard Value had been persuading Yahoo management to ensure a tax efficient sell-off of its remaining stake in Alibaba and Yahoo Japan. Yahoo holds around 15.4% stake in Alibaba, after Alibaba IPO, which at yesterday’s price would amount to $40 billion. Yahoo valuation at current market price is close to $47 billion. The transaction is likely to be completed by Q4 2015, after the one year lock in period of Alibaba share sale. With this spin-off Yahoo is estimated to have returned $50 billion to its shareholders.
Yahoo Tax Savings From Alibaba Spin-Off
The new spun off company will have all of Yahoo’s stake in Alibaba and some of Yahoo’s legacy businesses. The addition of legacy business is required for Yahoo to save tax, as according to US tax laws a spin-off of a mere holding company is not tax exempt. The spin-off should be for business reasons and should be involved in “actively traded business”. The legacy business being thrown in with Alibaba’s stock in the new entity is likely to be an insignificant one. While Yahoo has not spun-off its shares in Yahoo-Japan as of now, it has not ruled out such a move.
Yahoo stated that this move would save $3.31 billion in additional taxes, which is good for the shareholders. Yahoo will not have any inflow of cash in this deal. The spin-off will leave Yahoo a much smaller and vulnerable company. Yahoo would become more susceptible to calls of merger with other companies, including AOL, for synergy purposes. Earlier, Yahoo could shrug of such calls as resultant gain from synergy would have been a small amount for its $47 billion valuation. Moreover, Yahoo will no longer have the benefit of Alibaba stocks to drive its share price, increasing pressure from shareholders to perform. The company will have to turn around its core business to survive. The question is can it execute a turnaround?
Yahoo’s Fast Growing Business Segments
During the conference call Yahoo’s CEO, Marissa Mayer, spent considerable time explaining Yahoo’s turnaround strategy which is based on her acquisitions in new businesses. The mobile, video, native and social segment is growing fast. This segment grew 100% on YoY basis in Q4 and 95% on Year-over-Year basis in 2014. The segment contributed around $1.1 billion in GAAP revenues 2014 and management expects it to contribute $1.5 billion in the next year. Revenues from mobile segment grew by 23% quarter on quarter (QoQ) basis to $254 million. Yahoo’s revenue from native ads also grew by 32% QoQ from $80million in Q3 2014. With Yahoo’s core business stabilizing we can expect the fast growing segment to drive Yahoo’s growth in near future.
The spin-off will leave the shareholders richer, Yahoo smaller and Uncle Sam a bit poorer. The spin-off has bought some time for the management to set the things right in the company. With the core business stabilizing (leaving the PC display business aside, the core business grew at 7% on ex-TAC basis), the new and fast growing segment of mobile, video, native and social could drive growth.
Our Earnings Preview of Yahoo
- Yahoo is scheduled to release its Q4 2014 earnings on 27th of January after the market hours.
- Analysts estimate Yahoo to report a Non GAAP EPS of $0.29 on a revenue of $1.19 billion.
- Yahoo needs to have a credible plan for making future stake sales more efficient.
Yahoo Inc (NASDAQ:YHOO) is scheduled to release its Q4 2014 earnings on 27th of January after the market hours. The Yahoo earnings release will be for Q4 2014 as well as for financial year 2014. While the company has delivered earnings surprise in three of the last four quarters, it has been facing a sluggish performance in core advertising business. Analysts are also worried about how Yahoo will use the cash from Alibaba stake sale, and its acquisition strategy. Yahoo stock price is up 10.6% since Q3 2014 earnings release.
Source: Yahoo stock chart by amigobulls.com
Yahoo Q4 Earnings Analysts Estimates
Analysts estimate Yahoo to report a Non GAAP EPS of $0.29 on a revenue of $1.19 billion. The current consensus estimate implies a YoY decline of 37% in earnings from $0.46 in Q4 2013 and 6% YoY decline in revenues.
Yahoo has delivered an earnings surprise in three of the last four quarters.
In the Q3 earnings call management has given a Q4 GAAP revenue guidance of $1.2-1.24 billion. The ex-TAC revenue is expected to be in range of $1.14-$1.18 billion. The company expects EBITDA to be in range of $340 million to $380 million, while non-GAAP operating income is likely to be in range of $140 million to $180 million. This is based on management’s projection of operating expenses remaining flat at $800 million for Q4 2014.
Yahoo’s Display Business Slowing Down
One of the biggest concern about Yahoo has been its sluggish core display business growth. Yahoo's revenue from display business has been declining. While number of ads sold has been rising in display business for Yahoo, the cost per click has been declining resulting in overall decline in display revenue. The decline in cost per click indicates a deterioration in quality of display advertising.
Yahoo has recently entered into a deal with Mozilla to replace Google as default search engine in US. While firefox’s market share has been declining and it is relatively simple to change browser option in Firefox, on the whole the deal is going to have a push on Yahoo’s search revenue. Already the deal has started showing results. According to a post on Bloomberg, Google’s slice of the U.S. search engine market fell to 75.2 percent in December from 79.3 percent a year ago, while Yahoo jumped to 10.4 percent from 7.4 percent. Yahoo’s ex-TAC revenues from its lucrative search business have been growing over the last two years.
Yahoo’s mobile revenue has been growing in at a very fast pace. From being a non-existent segment a few quarters earlier, mobile is likely to contribute $1.2 billion this year. Yahoo had, for the first time, revealed revenue from mobile in Q3 2014 when the total mobile revenue stood at $200 million. Yahoo’s acquisition of Flurry, a mobile data analytics company that optimizes mobile experiences for developers, marketers, and consumers has definitely helped its cause. According to eMarketer, Yahoo will surpass Twitter in 2016 to the third place in US mobile ad revenue market
share. Mobile advertisement is growing much faster than any other form of online advertising, according to eMarketer. In US alone mobile ad market is likely to be a $40 billion market by 2016, from current value of $18.9 billion.
Free Cash and the Tax Problem
However, one of the most eagerly awaited piece of information during Yahoo’s earnings call will be its plan to make future stake sale in Alibaba and Yahoo Japan tax efficient ones. A one point reduction in tax rate is likely to save ~$400 million for Yahoo. Many investors are also worried about the way Yahoo is using the cash generated from the stake sale in Alibaba IPO. Yahoo is currently sitting on a pile of cash. Many investors believe that Yahoo is wasting money in acquiring unrelated companies, destroying shareholders wealth in the process. Starboard, one of its shareholder, has gone further to suggest that Yahoo should pursue a merger deal with AOL instead of acquiring companies. However, many investors believe that Yahoo needs to continue acquiring new companies in the hope of finding a YouTube or Instagram.
Strong growth in mobile advertisement and Yahoo’s partnership with Firefox is likely to help Yahoo beat its Q4 earnings estimate. Yahoo’s plans to make future stake sales more tax efficient will also generate value for the shareholders, making it an important point in the upcoming conference call.