The internet firm, Yahoo! (NASDAQ:YHOO), reported its third-quarter earnings on October 21, and the results were fantastic, beating analysts’ expectations in terms of both the top and bottom line. CEO Marissa Meyer said, “We achieved this revenue growth through strong growth in our new areas of investment – mobile, social, native and video – despite industry headwinds in some of our large, legacy businesses.” Soon after the results came in, the stock surged nearly 4% in the stock market and investors were delighted after the results with respect to the solid performance of the firm. Let’s check in to find out what were the key takeaways from the quarter from the investment perspective.
The quarter number mix
Yahoo! reported revenue of $1.09 billion and earnings of $0.52 per share during the quarter. The earnings did easily beat the analysts’ expectations which were stuck to $0.30 per share as earnings on $1.05 billion in revenue.
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The company’s core advertising revenue continued to disappoint with display ad revenue declining 6%, while its core ad search revenue improved by 6% year over year. The major highlight in this quarter earnings was the growth in mobile revenue which exceeded $200 million in the quarter, and expectations in this segment remain high for the entire fiscal year. With this note, let’s proceed further to discuss the key takeaways from the quarter which will keep investors interested in the Yahoo! stock.
Alibaba stake adds strength to balance sheet
Presently, the cash and equivalents balance for Yahoo! stands at over $12 billion after the quarter, mainly being influenced by the receipt of the Alibaba (NYSE:BABA) pre-tax IPO proceeds of $9.5 billion. After taking tax into consideration, the Alibaba IPO has added almost $6 billion of cash balance which it intends to distribute to its shareholders. Yahoo! sold close to 140 million shares in the Chinese company’s IPO last month, and still retains nearly 16% in Alibaba that is worth about $35 billion.
Over the past two years, Yahoo! has returned $7.7 billion to the shareholders using the share buyback scheme, and analysts have estimated that this trend of buying more shares will continue in the upcoming quarters. This is expected to improve the earnings per share and can also improve the company’s per share value in the future.
Mobile ad revenues get a solid boost
Analysts were speculating that Yahoo!’s mobile platform would become the chief driver of its revenue in the next few quarters – and this has been proved to be true in the third quarter in which total mobile unique visitors grew to over 500 million. This led to the growth in mobile ad revenue which posted $200 million in GAAP revenue. The CEO has added that it is expected that the gross revenue in mobile ad segment will exceed $1.2 billion in revenue this year.
Since the company is out to deliver personalized content as part of its strategy to gain traction in the segment, analysts are expecting the user base to expand substantially for Yahoo in the forthcoming quarter.
If the user base improves, it will in turn increase the page views and searches across all Yahoo! platforms, thus, improving the revenue across both display and search ad divisions.
According to Gartner, the global mobile advertising market will grow phenomenally and will stand at approximately $42 billion in 2017. And as Yahoo! is emphasizing growth in the mobile platform, it can bolster Yahoo!’s growth in the long term by capturing a substantial portion of the global advertising market.
The acquisition of mobile analytics and advertising firmFlurry has added color to the interest to grow in the mobile ad segment, and Yahoo!’s management appears upbeat on the revenue earned through mobile ads for the forthcoming quarters.
Revenue buoyed by increase in price per click
During the quarter, the search ad revenue rose 6% year-over-year to $450 million. While the number of paid clicks saw a climb this quarter, price per click was also increased by 17% by the company. This helped in building the revenue block from this segment during the quarter.
However, the display ad revenue declined 6% this quarter to $396 million. Though the number of display ads sold through Yahoo! properties showed a surge of 24%, the price per ad declined by 24% due to the unfavorable shift in mix of premium and low cost ads.
The company is out to generate more than $100 million in revenue in 2015 through sponsored advertising after the acquisition of Tumblr in May, this year. Going forward, it is being anticipated that if Yahoo! is able to successfully pitch the Tumblr platform to advertisers, its ad revenue might just increase significantly.
Investor amply rewarded
Yahoo! had always added to the investors’ kitty and even in this quarter there was repurchase of 8 million worth of shares at an average price of $36.76 for $282 million. In addition, there was an accelerated share repurchase agreement under which the company prepaid $1.1 billion and received an initial delivery of 15 million shares on September 30.
Despite the weak numbers posted in the display ad segment, Yahoo! seems to be on a growth trajectory with respect to the remaining segments where it has seen positive growth during the quarter. Also with the acquisitions in place, Yahoo! expects to grow into a larger and better enterprise in the quarters ahead. Let’s stay tuned.