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Yahoo! Inc. (YHOO) Knocks Out Wall Street

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Yahoo! Inc. (NASDAQ:YHOO) reported a fairly solid quarter. The company lowered its guidance, but was able to make up for it with revenue growth in search and its other equity interests.

Yahoo! Inc. (NASDAQ:YHOO)

Earnings highlights

The growth in certain business segments was not enough to offset the decline in revenue. However, revenue (excluding traffic acquisition costs) has been able to stabilize to a 1% year-over-year loss for the quarter. The company reported a 1% loss in revenue because the company saw a 2% year-over-year decline in display ad sales, and the price paid per ad has declined by 12%. The company was able to offset this decline with 5% year-over-year revenue growth in its search-advertising business.

The real upside comes from the equity interests that Yahoo! Inc. (NASDAQ:YHOO) has, which it reports as a part of net earnings and not as a part of revenue. This is why the company reports flat revenue, but came out with a 29.17% net profit margin (the company is more profitable than Microsoft Corporation (NASDAQ:MSFT)).

The earnings from its equity interests grew from $286 million in the second quarter of 2012 to $331.15 million in the second quarter of 2013. Yahoo! Inc. (NASDAQ:YHOO) currently owns 24% of Alibaba and 35% of Yahoo! Inc. (NASDAQ:YHOO) Japan. Alibaba reported 71% year-over-year revenue growth and 189% year-over-year net income growth. Yahoo! Inc. (NASDAQ:YHOO) Japan reported 0% year-over-year improvement in net income. The contribution to net income came primarily from Alibaba.

The company grew its earnings per share from $0.19 in the second quarter of 2012 to $0.30 in the second quarter of 2013 (67% year-over-year earnings per share growth). The company had a fairly phenomenal quarter.

The growth in earnings per share came from revenue growth, cost-cutting, and share buybacks:

  • Its ownership stake in Alibaba, paired with the revenue growth from search advertising, was the source of revenue growth.
  • The company reduced operating expenses by 6.8% year-over-year.
  • The total shares outstanding fell from 1.215 billion to 1.079 billion. Shares outstanding fell by 11.1%, which boosted the earning per share figure.

Long-term investment thesis

The company has implemented both short and long-term measures to generate earnings and revenue growth. The revenue growth from Alibaba is not included in the top line GAAP revenue that Yahoo! Inc. (NASDAQ:YHOO) currently reports, but when included, the company’s revenue has been able to grow. One of the primary reasons for owning Yahoo! is its large ownership interest in Alibaba.

However, excluding Alibaba, Marissa Mayer has been focused on improving the overall user experience of Yahoo! mail, Flickr, and its homepage. The company also hopes to generate mobile revenue growth, which has a lot of pent-up potential from emerging market economies.

Mobile monetization

Source: Statista

North America is currently the largest market for mobile advertising spending. Yahoo!, Facebook Inc (NASDAQ:FB), and Google Inc (NASDAQ:GOOG) are banking their hopes on mobile ads to sustain revenue and net income growth in the foreseeable future.

Facebook has opted to advertise within the Facebook Inc (NASDAQ:FB) home page in users’ news feeds. Because there isn’t nearly enough screen space to afford banner ads on smartphone screens, the typical Facebook Inc (NASDAQ:FB) user will scroll through his/her news feed rapidly, so advertising placement isn’t as burdensome to the user experience as some have speculated.

It is likely that Yahoo!’s display advertising business will continue to experience modest declines in pricing, as it addresses the ineffectiveness of advertising to smartphone users. Despite weaknesses in its mobile strategy, Yahoo! should be able to sustain high rates of earnings growth going forward. Analysts are expecting the company to grow earnings by 20.50% for the remainder of fiscal year 2013, and to follow that with 9.2% growth in fiscal year 2014.

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