Yahoo! Inc. (YHOO) reported fourth quarter earnings that beat the Zacks Consensus Estimate by 5 cents. Revenue beat the consensus by 40.8%. Google’s (GOOG) results also thrashed estimates last week, reflecting the recovery in advertisement spending.
Revenue
Gross revenue of $1.73 billion was up 9.9% sequentially and down 4.1% year over year. Revenue beat the consensus by 40.8% and was over the high-end of management’s guidance of $1.6-1.7 billion. The better-than-expected results were driven by strength in display and search marketplaces, as the online advertising market continued to recover. The affiliate business outgrew the overall business in the last quarter.
Net Revenue
Excluding traffic acquisition cost (the portion of revenue shared with Yahoo’s partners), net revenue for the quarter was up 11.2% sequentially and down 8.5% year over year. The U.S. accounted for 74% of net revenue.
Traffic acquisition cost (TAC) was up 6.7% sequentially and 9.8% from the year-ago period. Although both the U.S. and international markets contributed to the increase, international TAC saw bigger increases. Additionally, TAC as a percentage of total revenue declined by 109 bps in the U.S. and increased by 72 bps in international markets. The percentage of TAC to gross revenue for the international business is a little less than half that of the U.S. business.
Revenue by Product Line
Around 89% of quarterly revenue was derived from Marketing Services, while the balance was Fees-based. Marketing Services revenue was up 11.5% sequentially, as revenue from owned & operated (O&O) and affiliate sites grew 14.1% and 7.2%, respectively. Compared to the year-ago quarter, O&O revenue declined 8.6%, although affiliate revenue grew 6.1%. The O&O business benefited from sequential strength in display (up 26%) and search (up 4%). The decline from the year-ago quarter was broad-based.
Fees-based revenue was flattish sequentially, but declined 7.4% from the year-ago quarter.
The pro forma gross margin for the quarter was 56.8%, up 165 bps sequentially from 55.2%. The gross margin on net revenue was up 138 bps sequentially and down 26 bps from the year-ago quarter. The improvement in gross margin is attributable to management’s refocus of the company’s business, which increased traffic and resulted in several key properties being sold out.
Operating expenses of $698.2 million were 9.6% higher than the previous quarter’s $636.8 million. The operating margin was 16.5%, up 176 bps from the 14.8% recorded in the previous quarter. About half of the increase was attributable to the higher gross margin, with the balance coming equally from lower R&D and G&A expenses as a percentage of sales. Management continued to invest in sales and marketing, which was up 103 bps as a percentage of sales, although offset by declines in other costs. Operating profit as a percentage of net revenue was up 218 bps sequentially, but down 266 bps from the year-ago quarter.
Net Income
The pro forma net income was $225.0 million or 13.0% of sales compared to $234.0 million or 14.9% of sales in the previous quarter and $284.4 million or 15.7% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring charges, stock compensation expenses, amortization of intangible assets, litigation and other costs related to the Microsoft (MSFT) search agreement and the associated tax impact.
Including these special items, the GAAP income was $152.9 million ($0.11 per share) compared to $186.1 million ($0.13 per share) in the Sep 2009 quarter and a net loss of $303.4 million ($0.22 per share) in the Dec quarter of last year. The year-ago quarter was impacted by a goodwill impairment charge of $487.5 million.
Balance Sheet
The company has a solid balance sheet, with cash and short term investments of $3.3 billion ($2.35 a share), down $587.2 million in the last quarter. The company generated $351.1 million from operations in the last quarter and spent $169.7 million on capex, netting a free cash flow of around $81 million. There were no share repurchases in the last quarter and the company does not pay a quarterly dividend.
Guidance
Management expects first quarter 2010 revenue of $1.57-1.67 billion, down 3.3% to 9.1% sequentially from the seasonally stronger fourth quarter. TAC is expected to be 28-29% of GAAP revenue, operating income $90-110 million including stock-based compensation of around $95 million and excluding charges related to the Microsoft search agreement.
In 2010, management expects to grow both revenue and GAAP margins, with an effective tax rate of 35-40%. Capex is expected to come in at around $600-700 million. While the Microsoft deal (if consummated) is expected to improve the search business, management currently does not expect it to make a contribution in 2010.
The company reiterated its margin and ROIC targets of 15-20% each by 2012.
We have a Neutral rating on Yahoo! shares.
Read the full analyst report on “YHOO”
Read the full analyst report on “GOOG”
Read the full analyst report on “MSFT”
Zacks Investment Research
