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Why Yahoo! Inc. (YHOO)’s Revenue Isn’t Growing

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I believe the best way to look at Yahoo! Inc. (NASDAQ:YHOO) is as a portfolio of IT businesses, and the latest earnings call confirmed my view once more.

To begin with, according to the latest earnings call on July 16, Yahoo! Inc. (NASDAQ:YHOO)’s revenue remains flat at $1.07 billion. The earnings call, by the way, was full of details related to how some of Yahoo!’s apps (like the weather app) are experiencing amazing growth rates in terms of user base, or how it achieved a 59% decrease in employee attrition year-over-year. These facts are pleasant but somewhat meaningless, as the company has not been able to translate them into revenue growth. The truth is that no matter how promising the acquisition of Tumblr or how successful the user growth rate of their weather app is, Yahoo! isn’t growing in terms of revenue.

Yahoo! Inc. (NASDAQ:YHOO)One of the reasons for this sad fact is that Yahoo! Inc. (NASDAQ:YHOO) continues experiencing serious advertisement problems. 17 acquisitions in a single year have not been able to fix this. Search and other revenue showed slight growth, but this was offset by a strong decline in revenue coming from ads display, as this segment fell 11% in the quarter versus the prior year to $423 million. Non-GAAP operating income, which is the kind of income you should see as it is a key determinant of free cash flow, actually decreased by 13% year over year to $209 million.

The core business isn’t growing, but earnings are

However, not everything is bad news. In a similar fashion to traditional corporations who enjoy steady cash flow, but haven’t experienced organic revenue growth for quite a while, Yahoo! used share repurchases and took advantage of some of its most promising investments to increase earnings artificially.

First of all, because of its promising equity investments in Alibaba and Yahoo! Inc. (NASDAQ:YHOO) Japan, Yahoo! managed to increase non-GAAP net income by 6% from the second quarter to $386 million. The company received about $846 million from the redemption of the Alibaba Group preference shares and approximately $80 million in dividends from Yahoo! Japan!

Furthermore, they repurchased 45.3 million shares of stock in the quarter at an average price of $25.76, or $653 million, and spent $1 billion in acquisitions that was net of cash. All these factors have caused an amazing result: Yahoo! Inc. (NASDAQ:YHOO)’s core business isn’t growing at all, but earnings are growing artificially! And they were growing quite a lot: net income in this quarter rose about 46% from the same period of 2012, to $331 million, or $0.30 per share. Revenue fell 7% but net income rose 46%!

Is this actually good?

Well, nobody wants these kind of things to happen, specially after the company buys 17 startups to bring some growth to the table. However, the fact that Yahoo!’s core businesses are not growing doesn’t mean this is a bad investment. Yahoo! is a special stock. Because most of its earnings come from the appreciation in value of some equity investments the company made in the past, when you buy Yahoo!, you are actually buying a sort of technology ETF: it gives you exposure to Yahoo! Inc. (NASDAQ:YHOO) Japan and Alibaba, two promising IT businesses in Asia that have plenty of room for organic growth available.

Of course, Yahoo! is not always right about the investment it makes. No portfolio manager is! But the few times they happen to be right become so important for the stock that it can change everything. Just like the 24% stake in Alibaba is causing Yahoo!’s stock price to rise!

Is this sustainable? Well, at some moment investors will become more exigent about Yahoo!’s revenues figures. But it seems that won’t happen any time soon, at least not this quarter. Being over optimistic at Yahoo! Inc. (NASDAQ:YHOO) is, however, a clear mistake. There is no “turnaround” story here. At least not until now. And if 17 acquisitions in a single year didn’t manage to bring some meaningful level of revenue to the table, then something really crucial is missing. Yahoo’s CEO, Ms. Mayer, has made every effort to revitalize the core business in digital display advertising, yet the number of display ads sold has declined every quarter for the past two years. This quarter is no exception.

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