Yahoo Revs Flat, Display Down 7%
Yahoo’s core business still shows little sign of a turnaround, despite the renewed buzz that CEO Marissa Mayer has brought to the struggling Web giant over the last year.
Yahoo on Tuesday reported net revenue of $1.08 billion in the third quarter -- roughly flat with the year-earlier period -- as its ad business continues to sputter. The company posted adjusted earnings per share of 34 cents a share, up from 39 cents a year ago.
Wall Street analysts on average had forecast earnings per share of 33 cents on net revenue of 1.08 billion for the quarter.
Yahoo’s display ad revenue, excluding payments made to partners, fell 7% to $421 million, as the pricing of graphical ads continued to decline. The number of ads sold increased 1% -- the same as the prior quarter. Search ad revenue, excluding costs, rose just 3% to $426 million.
The drop in display ad revenue, after an 11% decline in the second quarter, is a particular cause for concern, considering that U.S. display advertising overall was up 9% in the first half of 2013 and overall digital advertising increased 18%, according to figures released last week by the Interactive Advertising Bureau.
A Macquarie Securities analysis of home page advertising on the major Web portals also showed that the share of oversized or custom ad units -- the most lucrative formats -- continued to shrink on the Yahoo home page in the third quarter.
Yahoo under Mayer has made more than 20 acquisitions, redesigned its home page and other key content properties, and released revamped apps like Flickr And Yahoo Weather. Traffic has also grown 20% to 800 million monthly users in the last 15 months, including 390 million from mobile devices.
But while advertising executives have generally praised Mayer’s efforts to revitalize Yahoo, the moves have yet to result in higher ad growth. Executives say that's partly because innovation on the content side has not been matched on the ad side.
During the earnings conference call, Mayer reiterated her formulation that Yahoo is engaged in a “series of sprints,” with the current focus being on building traffic and product quality. She said she expects advertising to start catching up with the traffic growth sometime within the next year.
On the search side, Yahoo saw the number of paid clicks increase 21% from a year ago, with that gain undercut by a 4% decline in price-per-click. Yahoo CFO Ken Goldman attributed the price drop to a higher share of lower-priced international clicks in the quarter.
Goldman also pointed analysts to a new metric called “search click revenue,” measuring gross search revenue (before traffic acquisition costs) and based on internal data excluding China and Japan, Korea, and the Microsoft revenue-per-search guarantee. That figure, which he suggested more accurately reflected Yahoo’s progress in search, was up 16% in the quarter.
Still, Yahoo’s share of U.S. search queries overall slipped to 11.3% in September from 12.2% a year ago (and from 15.5% two years ago), according to comScore data. While those figures only cover desktop data, Macquarie’s Schachter estimates Yahoo’s mobile search share at less than 5%.
With regard to ramping mobile advertising, Mayer said Yahoo has seen promising results in testing of native ad formats like its Stream Ad unit on mobile devices. She indicated that the company could potentially make more money from display ads in mobile than on the desktop.
Yahoo’s profit in the quarter -- up 24% on an adjusted basis -- was again lifted by the performance of Alibaba Group, the China-based e-commerce powerhouse in which Yahoo holds a 23.5% stake. Alibaba and Yahoo Japan, in which Yahoo holds a 35% share, contributed $233 million in earnings to Yahoo.
Alibaba is planning an IPO analysts project that could be valued at more than $100 billion. Yahoo on Tuesday said an agreement related to its stake in Alibaba has been amended, reducing the number of shares it will sell in the upcoming IPO to 208 million from 261.5 million.
The move should help Yahoo not only because its remaining shares will be valued higher, but it could also allow the company to later sell the unsold shares more tax efficiently at its own discretion, noted Stifel Nicolaus analyst Jordan Rohan. “The upside from a higher realized value in the stake in Alibaba more than offsets a weak core business,” he wrote in a research note.
For the the fourth quarter, Yahoo lowered its revenue outlook to between $1.18 billion and $1.22 billion, with adjusted operating income expected to be between $240 million and $260 million.
In addition to holding a live video Webcast of its earnings
call for the second straight quarter, Yahoo executives for the first time also fielded questions submitted prior to the call via tweets tagged #YHOOearnings and through email.
Macquarie analyst Ben Schachter suggested Facebook’s display ad growth is coming at the expense of home-page advertising on more traditional sites, like Yahoo and AOL. Google will account for 17.6% of U.S. digital display ad spending this year, followed by Facebook at 15.5%, and Yahoo at 7.7% (down from 9% in 2012), according to eMarketer.