Though Internet advertising has come ahead by leaps and bounds, it is still working extremely hard to take a better chunk of advertising dollars especially from television. Ad pundits have constantly pointed out the strength of video ads, a form of ads on the internet that could help the big tech giants grab a bigger share of the overall advertising market. True to that, big digital advertising companies including Google (GOOG, Financial) and Facebook (FB, Financial) have massively beefed up their video ads platform. Late to the race but now Yahoo!’s (YHOO, Financial) big ticket acquisition of BrightRoll will put it on the map and hopefully, it could arrest the continuous decline in the video advertising business.
Analyzing the acquisition
"BrightRoll is a large, growing and profitable business with net revenues expected to exceed $100 million this year," said Yahoo! as it announced its acquisition of the video ad platform. For a business reporting $100 million in revenue, Yahoo! is paying $640 million that is around 6.5 times the revenue. While in absolute terms, this acquisition might not match up to some of the big-ticket acquisitions that have been made by Yahoo! since Marissa Mayer took charge of the ailing company but definitely, a near 7x multiple is also considerable for investors.
As I mentioned in the first paragraph, Yahoo!’s display business is seeing a decline in revenue. In fact, the last quarter results showed a 6 percent decline in revenue on a year-over-year basis. Though the CEO immediately balanced this negative number with a positive growth number for ads sold, the investors and analysts did seem concerned regarding the fate of display.
Now, with the acquisition of BrightRoll, Yahoo! is confident of reviving growth in the display ad revenue. The company notes BrightRoll's programmatic (automated) ad platform handles ad-buying for 87 AdAge Top 100 U.S. advertisers, as well as all of the top 10 demand-side (advertiser-facing) online ad platforms. Meanwhile, BrightRoll's publisher-facing offerings monetize ad inventory for "tens of thousands" of sites/apps. In nutshell, it is quite plausible that the display ad platform of Yahoo! can gain prominence among advertisers and hence, bring business dollars to the company.
Checking out search and mobile!
After this media and entertainment giant reported its quarterly results, the shares went up by 3.3 percent in after-hour trading because the company meet Street expectations and among other things, the search and mobile revenue showed reasonable improvement to bring cheer. In the case of search advertising, the primary reason for growth was an uptick in the price per click. Search ad revenue (ex-TAC) grew 6 percent on a year-over-year basis to $450 million owing to a sturdy increase of 17 percent in price per click. Though advertising giants like Google and Facebook lead this race with colossal numbers, Yahoo! is catching up. However, it has to undertake massive efforts to improve the performance of its search ads through better interfaces and high quality traffic.
Turning now to mobile, the third quarter was definitely a cheerful one. The company continued to report growth in its total mobile unique visitors which grew to over 550 million in the quarter. The growth in mobile user base also translated into growth in mobile revenues as the company posted $200 million in GAAP revenue. The mobile revenue doubled year-over-year because of the company’s efforts to monetize its mobile apps via native ads. Talking of native ads, it is quite significant to know that Yahoo!’s native ads offering through their Gemini platform has become quite strong. Going by the numbers, native ads had revenues of $65 million in the quarter across both mobile and desktops. Since Marissa Mayer took helm of the company, Yahoo! has been focusing hard on developing robust products that have, in a big way, transformed the mobile experience of its users and increased engagement.
Merging with AOL?
Now that I have talked a good deal about Yahoo!’s advertising channels and the state of its current portfolio, let me discuss a crucial report that appeared on Reuters dated November 12th. At least two of the top 10 Yahoo Inc. shareholders have petitioned AOL (AOL, Financial)CEO Tim Armstrong to explore the possibility of a merger and run the combined company. Apparently, these shareholders are quite unhappy with current CEO Marissa Mayer’s leadership skills. As the report also highlights, this particular move follows an activist campaign by hedge fund Starboard Value LP, which is pushing Yahoo! to consider a deal with AOL and unlock Yahoo!'s valuable stakes in Asian Web companies. (Read the full report here)
Though I am not sure of the sense and value that this merger will bring to the table, one thing needs to be understood by investors. The acquisition of BrightRoll gives Yahoo! the programmatic ad platform which is being increasingly used by advertisers to automatically target website visitors at lower costs. The programmatic ad platform has been at the centre of every tech giant’s display strategy including AOL and now that Yahoo! has paid $640 million, it has become a part of this group. As a matter of fact, BrightRoll is a direct competitor to Adap.TV, a video ads platform purchased by AOL recently. Hence, this merger could actually not go down so well considering the histories of both companies, management team (both CEOs from Google) and product portfolio. On the other hand it could create a bigger and better entity but the probability is less.
Takeaway
Yahoo!’s share price has nearly tripled since the joining of Marissa Mayer, but its performance has been almost flat with the exception of mobile revenues. Analysts believe that the heavy uptick in price was due to the expectations from the Alibaba (BABA, Financial) IPO and now that it has gone through, investors would start looking at Yahoo! for the company it is. In my opinion, Yahoo! did have a massive windfall from Alibaba’s IPO and is still figuring out ways in which it can ensure maximum benefit to the shareholders, but it is still a league behind in the advertising business. Marissa Mayer has been acquiring aggressively but sadly enough, these have not yielded results as expected. Considering all these viewpoints, I would not suggest inclusion of Yahoo! to your portfolio.
