First-quarter results
The company’s first quarter EPS of $0.35 beat analyst estimates of $0.24. However, its revenue excluding traffic acquisition costs (ex-TAC) was flat versus last year. The company continues to face a downward trend in its display revenue, which was down 11% versus last year. This was partially offset by gain in its search revenue, which increased 6% to $609 million.
A positive note from the company’s earnings is the growth in mobile users. The company’s mobile users grew from 200 million at the end of 2012 to 300 million at the end of the first quarter. This was mainly driven by Yahoo! Inc. (NASDAQ:YHOO)’s investments in mobile-apps as well as the general migration of users to wireless devices.
Acquisitions
In the last couple of months, the company has acquired at least six start-ups, such as Stamped, OntheAir, Snip.it, Alike, Jybe, etc. More recently, it acquired mobile news aggregator Summly for $30 million. These acquisitions reflect the company’s increasing focus to improve its mobile service. The company sees these acquisitions as a big opportunity going forward and a catalyst for its turnaround and growth. The CEO has demonstrated the prowess of these purchases by using Summly to condense her 2,000-word earnings script to 140 words.
Mobile opportunities
The company acknowledges the opportunities in mobile, but the question is how will it monetize its mobile properties. It is already in a good position as users are already using its apps for checking the weather, getting news, financial quotes, checking email, sports scores, etc. This indicates that it already has the content on its users’ phones, but it needs to provide more value around it. The company is taking necessary steps to improve this engagement and to grow its mobile footprint.
Declining ad revenue
This is the primary concern for Yahoo! Inc. (NASDAQ:YHOO) as its revenue from display ads decreased 11% in the first quarter, coming in much lower than analysts’ expectations and indicates that the company is not doing enough to lure advertisers. EMarketer predicts that Yahoo!’s U.S. market share of display ads will decline to 7.7% in 2013 as compared to 9% in 2012.
In this space, Yahoo! faces tough competition from its arch-rival Google, with an expected market share of 18% and Facebook Inc (NASDAQ:FB), with a 16% share. Another contributing factor to the declining sales was lower pricing. According to Bloomberg, the prices for search ads declined 7% and display ad prices declined 2%.
On the declining ad revenue, the CEO stated on the recent earnings call that so far the company was focused on hiring and changing the company’s culture. To help its push for product improvements, Yahoo! Inc. (NASDAQ:YHOO) hired 120 new employees with computer science degrees in the fourth quarter. She also mentioned that from now on, the company will move on to its next phase or “sprint”, which will focus on developing new products and updates to its services.
Competition
It goes without saying that Yahoo! Inc. (NASDAQ:YHOO)’s strongest competitor is Google Inc (NASDAQ:GOOG). In the first-quarter, the company’s consolidated revenue, which includes the Motorola business and traffic acquisition costs, jumped to nearly $14 billion from $8 billion in the previous year. Its EPS also rose to $9.94 as compared to $8.75 in the previous year. However, a key concern raised by analysts is the company’s expansion into areas which are not related to the company’s core business.
These projects mainly included Google Glass, driverless cars, and the high-speed Google Inc (NASDAQ:GOOG) Fiber Internet and TV service. Further, the Motorola business still continues to be a turnaround business. It posted an operating loss of $179 million in the recent quarter. But, despite these few negatives, Google Inc (NASDAQ:GOOG) still remains a pretty safe bet and would be ideal for an investor looking for a safe and tried and tested investment.
Another competitor, Baidu.com, Inc. (ADR) (NASDAQ:BIDU), has an established presence in its domestic market and is strong competition for Yahoo! Inc. (NASDAQ:YHOO) in its regional market. Baidu.com, Inc. (ADR) (NASDAQ:BIDU), which is commonly known as China’s Google, holds a market share of 80% in the country. The company recently reported weak first-quarter results as it faced rising costs due to increasing competition from Qihoo 360.
Qihoo 360 has been slowly increasing its market share and now currently holds 12.5% of the market. To boost growth and combat competition, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is spending more money on mobile technology. Its research and development expenses increased 83% from last year. Further, it posted its slowest quarterly profit due to increasing traffic acquisition costs.
Actual revenue and EPS of $961 million and $0.95, respectively, missed consensus estimates of $969 million and $1.03 per share. However, although Baidu is much riskier than Google and Yahoo!, it has very strong opportunities for growth. It has a lot of headroom because of China’s huge population and relatively smaller Internet penetration.
Conclusion
Yahoo! Inc. (NASDAQ:YHOO) is on the path of a turnaround with a new management in which investors can finally believe. Ms. Mayer’s approach seems appropriate for the long run, but these changes may look messy over the next few quarters. Further, the company understands its growing opportunities in the mobile space, and as a result, it has made weaving Yahoo! services around mobile devices as a central part of its turnaround strategy. It also plans to work alongside companies like Apple Inc. (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB) to broaden its reach.
The company’s share price may face a few bumps as the company treads along the turnaround path. But, at the same time, it will provide strong returns in the long-term once the company recovers.
The article Turnaround Story Equals Strong Long-Term Investment in This Stock originally appeared on Fool.com and is written by Shas Dey.
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