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Yahoo (YHOO) Q3 Earnings Could Expedite the Verizon Deal


Yahoo! Inc.’s YHOO third-quarter earnings exceeded the Zacks Consensus Estimate but revenues missed the same by a slight margin. Shares barely moved as investors are actually looking forward to the possible sale of the company rather than its earnings.

The results undoubtedly show signs of a business revamp. Marissa Mayer stated that the company will continue to make its business strong and looks forward to integrate with Verizon. She also stated that Yahoo will remain deeply responsible for protecting users’ information and is making continuous efforts to retain their trust.

The late admission of the massive 2014 cyber-attack and the news that Yahoo developed a custom software program to scan all of its users’ incoming emails for particular information demanded by the FBI had increased privacy concerns and casted a cloud over the Verizon deal.

Decent third-quarter results could convince Verizon that there is no material impact on Yahoo’s business, assets, operations or financial condition due to the data breach. Its sale plans also remain on track.

YAHOO! INC Price, Consensus and EPS Surprise

The numbers in detail-


Yahoo reported GAAP revenues of $1.305 billion, up 6.5% year over year but slightly down sequentially. Traffic acquisition cost (TAC) was down 1% sequentially but up 100.5% from last year. Excluding these costs in all periods, net revenue was down 2% sequentially and 16.9% year over year.

Yahoo combines revenues from O&O and affiliate sites and presents under Search and Display categories.

Search revenue (ex-TAC) was slightly down sequentially and 24.1% year over year. Key metrics were a huge disappointment in the last quarter, with paid clicks dropping 22% year over year. Price per click (PPC) grew 9%. The company continued to maintain good relations with Microsoft MSFT, Alphabet GOOGL, Apple AAPL and Mozilla.

Display revenues (ex-TAC) grew 4.3% sequentially and 1.3% from the comparable quarter of 2015. The number of ads sold decreased 5% from the year-ago quarter with price per ad (PPA) increasing 1%. The decreased volumes were attributed to lower property supply, especially in core verticals sold through programmatic channels and continued growth in the native syndication business. The stronger pricing was attributable to the ongoing mix shift to the programmatic model.

Mavens (mobile, video, native, social) grew 4% sequentially and 24.2% from a year ago.

Mobile growth is extremely important because of the increasing use of mobile devices to connect to the Internet. Management has started breaking out traffic-driven mobile revenues, which came to $432 million in the third quarter, of which Yahoo paid out $50 million to its revenue sharing partners.

Other (fees, listings and leads) revenues were down 0.5% sequentially and 57.8% from last year.

Search, Display, and Other platforms represented 54%, 36% and 10% of Yahoo’s third-quarter ex-TAC revenue, respectively.

By geography: Yahoo generated around 77.4% of revenue on an ex-TAC basis from the Americas (up 3.4% sequentially but down 18.4% from Sep 2015), around 6.6% came from the EMEA region (down 7.2% sequentially and 17.9% year over year) and 16% from the Asia/Pacific (slightly down sequentially and down 9.2% year over year).


Yahoo generated a gross margin of 46.1% in the third quarter, up 235 basis points (bps) sequentially but down 1,094 bps year over year.

The company generated operating margin of -4% that was better than the previous the year-ago quarter’s -6.6%.

Net Income

Yahoo’s non-GAAP income was $191.2 million or 14.6% of sales compared with income of $145.743 million or 11.1% of sales in the year-ago quarter

Including the special items and the amount given out to non-controlling interests, Yahoo’s GAAP net income was $162.8 million (17 cents per share) compared with $76.26 million (8 cents per share) in the September quarter of last year.

Balance Sheet

Yahoo’s cash and short-term investments balance was $6.60 billion at quarter-end, up $219.4 million during the quarter. The company generated $217.9 million of cash from operations, of which $43.2 million was spent on capex.


Yahoo provided limited guidance for the fourth quarter of 2016. Accordingly, revenues are expected to be in the range of $1.360-1.400 billion, TAC revenues are likely to be $480 million and revenues on an ex-TAC basis are projected to be $880-920 million. Management expects adjusted EBITDA to be in the range of $260 to $300 million; and non-GAAP income from operations to be in the range of $140 to $180 million.

For 2016, the company expects revenues of $5.060-5.100 billion, TAC of $1.620 billion, adjusted EBITDA of $810 to $850 million and non-GAAP income from operations of $300 million to $340 million.

Zacks Rank

Yahoo shares currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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