Yahoo! Inc. (YHOO) reported fourth quarter non-GAAP earnings that beat the Zacks Consensus Estimate by 8 cents. The 22.3% sequential increase and 5.1% year-over-year decline were better than what most investors were expecting. As a result, shares gained 2.93% in after-hours trading.
Revenue
Yahoo reported GAAP revenue of $1.22 billion, which was down 7.8% sequentially and up 0.6% year over year. TAC costs were down 7.3% sequentially and 4.0% from last year. Excluding these costs in all periods, net revenue was down 7.8% sequentially and up 1.2% from last year, slightly ahead of the consensus and management’s guidance.
Yahoo combines revenue from O&O and affiliate sites and presents under Display and Search.
Display revenues (ex-TAC) declined 16.8% sequentially and 3.6% from last year. The interCLICK acquisition contributed $10 million. Monetization of Yahoo’s key properties where engagement still remains quite high was inadequate.
Overall, the APAC region was the saving grace, having grown 6% from last year with the Americas and EMEA more than offsetting this with declines of 5% and 4%, respectively. Yahoo also saw issues with its guaranteed placement supply and sell-through, which were partially offset by improving yields.
Yahoo’s performance in display is particularly disappointing, since most market research firms are projecting strong growth here due to underlying drivers, such as brand building on online properties. Since Yahoo does not appear to be gaining from this trend the way archrival Google (GOOG) appears to be gaining, it looks like the company is steadily losing market share not just to Google, but also emerging Internet company, Facebook.
Search (ex-TAC) was up 2.2% sequentially and 7.5% year over year. Since query volumes up slightly in the Americas and flat in the rest of the world, RPS was the primary driver of growth from the year-ago quarter. Yahoo stated that the Americas click-through rate also improved in the high single-digits. The partnership with Microsoft Corp (MSFT) remains below expectations, although Yahoo is protected with the RPS guarantee (which has been extended to 2013).
Other (fees, listings and leads) revenues were down 3.2% sequentially, while increasing 1.3% from last year.
Display, Search and Other platforms represented 42%, 36% and 22% of Yahoo’s fourth quarter revenue, respectively.
Yahoo generated around 74% of revenue on an ex-TAC basis from the Americas (down 5.6% sequentially and up 1.6% from March 2011), around 8% came from the EMEA region (down 19.5% sequentially and 8.5% year over year) and the balance from the Asia/Pacific (down 10.7% sequentially and up 4.7% year over year).
Yahoo generated a gross margin of 67.4% in the last quarter, down 278 bps sequentially and 151 bps year over year. Total operating expenses of $638.0 million were down 3.6% from the previous quarter and up 1.5% and year-ago quarter.
Product development costs were down as a percentage of sales from the previous and year-ago quarters, while S&M increased significantly from both quarters. G&A was up sequentially, but down from last year. The net result was an operating margin of 15.2% that shrunk 502 bps sequentially and 200 bps from the year-ago quarter.
Net Income
Yahoo’s pro forma net income was $301.2 million or 24.7% of sales compared to $321.3 million or 24.3% of sales in the previous quarter and $265.1 million or 21.8% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring charges and amortization of intangible assets in the last quarter.
Including these special items, tax adjustments and the amount given out to non-controlling interests, Yahoo’s GAAP net income was $286.3 million ($0.23 per share) compared to $295.6 million ($0.24 per share) in the December 2011 quarter and net income of $223.0 million ($0.17 per share) in the March quarter of last year.
Balance Sheet
Yahoo has a solid balance sheet, with cash and short term investments of $2.21 billion, up $154.3 million during the quarter. The company generated $297.5 million from operations in the last quarter and spent $109.8 million on capex.
After adjusting for this and $8.2 million for excess tax benefits from stock awards, free cash flow came to around $195.8 million, down from $301 million in the fourth quarter. The company also spent $70.5 million on share repurchases in the last quarter. Yahoo does not have any debt.
Guidance
Yahoo expects second quarter 2012 revenue (ex-TAC) of $1.08 billion, or down 11.2% sequentially (in-line with the consensus). TAC is expected to come in at $140-150 million and other costs at $915-945 million. This is expected to generate operating income of $115-195 million.
To conclude
Yahoo’s revenue guidance was in-line with the consensus estimate of $1.08 billion and we remain skeptical about new management’s ability to turn the company around. While display remains a key business for Yahoo, segment results were extremely disappointing. In the meantime, Yahoo’s search business remains very weak, with market share numbers dwindling. Search-related issues are likely to continue for a few more quarters at least and even after that, growth remains uncertain given the tough competition.
Cost controls and efficiencies are likely to continue. However, we expect management to continue investing in the business, which could be a pressure on operating margins.
Therefore, while the improving ad market will continue to benefit Yahoo and a leaner cost structure will help cash flow and earnings growth, these factors will be mitigated by competitive pressures.
The shares carry a Zacks Rank of #3 (short-term Hold recommendation). We are also Neutral longer term (3-6 months).
