On the face of it, Yahoo! Inc. (NASDAQ:YHOO)’s most recent earnings report was quite encouraging. EPS beat the consensus by a generous margin, while revenue was mostly flat. Initially, the stock was up a bit following the release. However, the enthusiasm quickly faded as investors dug a little deeper through the report.
Shortly after the initial pop, the stock sagged again. What had investors worried about the once-great internet giant? Declining ad revenue was likely the cause.
Ad Revenue Woes
Q1 2013 EPS came in at $0.35, well above the $0.24 figure analysts were expecting, and up 36% from the same period a year ago. At first glance, this looks pretty good. GAAP income from operations was up 10%, with GAAP net earnings rising to $390 million for the quarter. Yet analysts were quick to point out that the company was earning more from its Asian holdings, especially from its 24% stake in Alibaba, a Chinese marketplace website which is delivering staggering top line growth.
Earnings from investments for the quarter totaled nearly $216 million, easily outpacing its operating income of $186 million. One analyst was quoted as saying that “they are making more money (as) an investment house.” While this isn’t necessarily a bad thing, Yahoo! Inc. (NASDAQ:YHOO) is not an investment house.
Instead, Yahoo! relies on advertising revenue for much of its income, which is where the pain really lies for this earnings report. Yahoo’s core business of display ads, which accounts for roughly 40% of its total revenue, tumbled 11% to $402 million. Analysts were expecting a dip of 9%, or revenue of $432 million for the business.
Still, CEO Mayer, who saw the stock price of the company rise some 50% under her leadership, remains confident about the company’s ability to turn things around, remarking that these things take time. She expects the company to see some growth by the second half of the year. Analysts remain cautious on the 2013 outlook, which many believe is too optimistic considering the dwindling ad revenue.
It makes sense to compare Yahoo! Inc. (NASDAQ:YHOO)’s results to those of two other internet titans, Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG), since they all rely heavily on advertising revenue to fuel growth. Simply put, both of these companies are doing a lot better at growing advertising revenue than Yahoo! is.
Facebook, for its Q4 2012 report, delivered advertising revenue of $1.33 billion, representing 84% of their total revenue and up 41% compared to the same period a year ago. Excluding foreign exchange translation, this figure would have been up 43%. Mobile revenue was doing particularly well, contributing 23% to total revenue compared to 14% in Q3.
Google is also growing the top line a lot faster. For Q4 2012, the company delivered consolidated revenue of $14.42 billion, up 36% year-on-year. Revenue from Google-owned sites increased 22% year-on-year and revenue from sites in the Google network grew 19%.