Core Yahoo!
In 2Q13, Yahoo! Inc. (NASDAQ:YHOO)’s topline came in $1.14 billion which is a 7% decline on a Y/Y basis. Yahoo’s operating income stood at $137 million, which represents a 12% operating margin. The company’s net income surged to $331 million, which represents a net income margin of 29%, or a diluted EPS of $0.30.
The healthy increase in Yahoo’s bottom line was heavily driven by equity earnings from Yahoo Japan and Alibaba. The combined earnings from those holdings for 2Q13 came in at $225 million or 67% of total Yahoo’s net income.
Display and Search in decline
However, Yahoo! Inc. (NASDAQ:YHOO)’s core business is still seeing declines in terms of revenues and price per ad. Yahoo’s display revenues declined 12% Y/Y to $472 million. But the real disappointment in Yahoo’s display fortunes was the 2% Y/Y decrease in the number of ads sold and a sizable 12% Y/Y decrease in the price per ad. This shows that making Yahoo! even a moderately growing business will take some time.
On the search side, Yahoo’s revenues stood at $418 million for 2Q13 a 9% Y/Y decline. In spite of the decline, the amount of Paid Clicks increased 21% Y/Y, but the price per click came down 8% Y/Y. However, Yahoo is not the only Internet name to see more ads being portrayed but at a lower price. The 800 pound gorilla in the search space, Google Inc (NASDAQ:GOOG). In Q2 2013, Google Inc (NASDAQ:GOOG) reported very similar trends–paid clicks increased 23% Y/Y and the cost-per-click decreased 6%. The news of Google Inc (NASDAQ:GOOG)‘s decline in CPC led to a sharp sell-off of Google shares. However, unlike Yahoo! Inc. (NASDAQ:YHOO), Google’s revenue growth has been increasing at a healthy clip of more than 19%.
Yahoo extended the revenue per search (RPS) guarantee with Microsoft Corporation (NASDAQ:MSFT) in Q2 for another year, and will receive fixed quarterly payments during the period. Yahoo will be investing in search to ramp up its growth in search, and is actively working with Microsoft’s Bing to ramp up search usage. However, Yahoo’s management doesn’t expect Microsoft Corporation (NASDAQ:MSFT)’s guarantee to cause a material positive impact on Yahoo’s revenues, so it is likely a very small portion of total search revenues for Yahoo.
However, in the U.S. search market, Microsoft Corporation (NASDAQ:MSFT) has increased its market share to 17.9%, at the expense of Yahoo which fell to 11.4% in the month of June, according to comScore. Yahoo’s revenues from display and search are expected to be flat, and/or lose market share to stronger Internet rivals in the near future.
And Microsoft can likely capitalize on this weakness from Yahoo! Inc. (NASDAQ:YHOO) and gain more market share in the search engine space, and gain more ground on Google. But Google’s search platform has been dominating the search engine market with more than 65% market share for years, a phenomenon that will almost certainly continue for a long-time going forward. And this market dominance earned Google roughly $29 billion in revenues from search advertising in the last twelve months, assuming its display business driven by YouTube earned $4.9 billion in the last 4 quarters.
Rising value of Asian Assets
Yahoo! is close to multi-year highs, after the company posted solid numbers for its crown jewel investment, Alibaba. Yahoo! has been very active in M&A and bought a number of small companies to integrate their technologies into various Yahoo! portals. A number of analysts have upgraded Yahoo! to an Overweight Rating, citing that the public market value of Alibaba is now worth up to $120 billion. The value of the company is very heavily tied to Alibaba’s IPO, which protects a substantial amount of downside risk in Yahoo.
In the last few years, Yahoo earnings have been increasingly flowing in from equity method investments primarily from Yahoo Japan and its crown jewel, Alibaba. Both these companies have an ever increasing contribution for Yahoo’s bottom line, in the wake of a weakened position in Yahoo’s search and display businesses.
Mobile, Video and Tumblr; Newer revamped products
Yahoo! Inc. (NASDAQ:YHOO) has made a number of changes to its user interface and continues to make progress in newer avenues like social and mobile to drive its fortunes. Yahoo’s page-view traffic is on the rise, after dipping in 2012, thanks to a number of changes to its user interface.
The increase in user traffic in Yahoo was because of the newer and modified versions of some of its more popular consumer properties including Search, News, Sports, Weather, Mail, Flickr, Finance etc. on desktop and on mobile. And consumers have ramped up their usage and user engagement on Yahoo’s platform. Yahoo also introduced newer ad formats on its properties to enhance its monetization efforts- on display, video etc.
On mobile, Yahoo surpassed more than 340 million monthly mobile users. Mobile is a core focus of the company, and might be a strong growth engine in the future. And if Yahoo can ramp up its mobile advertising business, the segment can grow its ad revenues on mobile. In addition, Yahoo launched newer version of the Yahoo app for iOS and Android, which drove daily users up by 55%.
On video, Yahoo is making investments to build its ad inventory. Yahoo’s video inventory gets sold out months before so the company will work on ramping up its capacity, and add more content to do so. Yahoo will be working closely with the social asset, Tumblr to ramp up monetization on Tumblr’s platform. However, Tumblr is unlikely to generate material amounts of revenue for Yahoo in 2013. Tumblr is seeing solid traction with more than 250K new blogs being created daily and more than 75 million posts each day.
Going Forward
Yahoo did notch down its guidance for Revenues, EBITDA and operating income for fiscal year, 2013 based on the company’s weak performance in the first half of the year. Yahoo! Inc. (NASDAQ:YHOO) has shut down a number of its less used consumer services, and ramped up its focus on the ones that can gain more momentum among customers
Yahoo’s management stated that the company will keep on focusing on its 4 keys growth engines to fuel its future growth, which are—search, mobile, video and display. But it might take years for Yahoo to get back on track, as the company is losing ground to faster and more dynamic Internet companies.
The article Yahoo!: Long Road to Growth originally appeared on Fool.com and is written by Ishfaque Faruk.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Google and Yahoo!. The Motley Fool owns shares of Google and Microsoft. Ishfaque is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
