Do you Yahoo! (NASDAQ: YHOO)? After last night's disappointing earnings, fewer investors do and, after examining the company's results, you might understand why.
Revenue was 2% lower year over year, but adjusted earnings rose 31%, to $0.46 per share. The bottom line handily beat analyst expectations of $0.38 per share in earnings, while the top line was in line with what Wall Street had expected. The biggest problem with last night's report was a larger-than-expected 6% decline in display ad revenue, which came in spite of a 3% increase in actual ads served (ad pricing was off 7%). CEO Marissa Mayer claimed to be "concentrating our efforts on revenue" in the company's earnings call, but those efforts have yet to pay off, as you can see in both Yahoo!'s quarterly results history and in its trailing 12-month history:
Source: Morningstar and Yahoo! earnings report .
Source: Morningstar and Yahoo! earnings report .
Yahoo!'s top line has been in a gradual, but unmistakable, downtrend for some time now, and the company failed to change that in 2013. Excluding the substantial one-time impact of Mayer's sale of some Alibaba assets last year, Yahoo!'s bottom line has made some progress, though it may not be as significant as investors would like. Quarterly net income was 18% higher in the latest report than it was in the same quarter of 2011, but free cash flow was 20% lower in the latest quarter than it was for that period. It's difficult to accurately compare this quarter to 2012 because of the impact of that Alibaba sale, but GAAP net income was 28% higher in the latest quarter than it was in the year-ago quarter, closely in line with the adjusted result headlining Yahoo's report.
Speaking of Alibaba, the Chinese e-commerce giant remains a key part of the Yahoo! story, and investors were watching this report closely for indications of strong progress. Yahoo! owns 24% of Alibaba, which reported a 51% year-over-year growth in revenue for its latest quarter, to $1.78 billion -- a larger result than Yahoo!'s own revenue in the same period. However, growth is decidedly slowing sequentially, as last quarter saw revenue growth of 61%, and the quarter before that saw 71% revenue growth year over year. Alibaba and Yahoo! Japan (of which Yahoo! owns a 35% stake) now contribute "approximately the same amount" to Yahoo!'s "earnings in equity interests" line, according to Mayer. Those earnings contributed $222 million of Yahoo!'s $348 million in net income in the latest quarter, a big jump from the $149 million recorded in the year-ago quarter.
Looking ahead, Yahoo! now expects to earn between $1.12 and $1.16 billion in revenue (between $1.06 billion and $1.10 billion excluding traffic acquisition costs) for the first quarter of 2014, and its adjusted operating income is projected to be in the $130 million to $170 million range. Both projections were weaker than anticipated -- in EPS terms, the high end of Yahoo!'s guidance is roughly $0.16, well below the $0.41 consensus. It would take at least $245 million in earnings from Alibaba and Yahoo! Japan to make up the difference, which is certainly feasible. However, since the high end of Yahoo!'s operating income projection is slightly below the $172 million reported in this quarter, it's certainly not reassuring for investors hoping that the core business will improve.
Yahoo! continues to be more of a play on its interests in Asian ventures than it is an investment in a strong American online brand -- Yahoo! Japan and Alibaba are estimated to comprise roughly 75% of the company's total valuation. Yahoo's numerous acquisitions have yet to reestablish it as a premiere property, but the company earns enough to have some leeway as it continues to execute its return-to-growth strategy. The next earnings report will be important, as it will show Alibaba's fiscal fourth-quarter results. (Yahoo! reports these results one quarter behind its own.) This period included a major Chinese online shopping day, similar to America's Cyber Monday, so it could produce renewed momentum in Alibaba's growth rates.
