Yahoo! has been making a lot of changes to its business, but the results haven't flown through its financials, yet. The company saw revenue decline last year, but user traffic hit record levels. The company is focused on advertising revenue growth through turnaround in its core business. There is limited downside risk on Yahoo! because of its investment holdings, and share buybacks will be accretive to its earnings per share.
Decent financials
Yahoo!'s 2013 revenue declined 6% year-over-year to $4.7 billion, but operating income increased by 4% to $590 million. The company earns most of its revenue from the Americas, with 74.4% of total revenue from the Americas region in 2013. In 2013, 65.1% of Yahoo!'s total net income came from the company's equity interests, primarily Alibaba and Yahoo! Japan. In recent years, the company has been heavily dependent on these two holdings for EPS growth.
The company ended last year with $5 billion of cash and securities on its balance sheet, as the company raised cash through the issuance of $1.3 billion in convertible debt. Yahoo! bought back 129 million shares, spending $3.3 billion for an average cost of $25.95 per share. Based on Yahoo!'s current stock price, the buybacks have been accretive to earnings, and the company increased its current share buyback program to $5 billion, which should help grow its bottom line in the future.
Making changes
Yahoo! has been implementing newer interfaces on its various portals, which has aided growth in user traffic. The company launched newer versions of its popular platforms, including Yahoo! Finance, Yahoo! Mail, and the photo-sharing platform, Flickr. Yahoo! ended 2013 with 800 million active users, a 20% increase.
Yahoo has become more cost-efficient, as the company saw operating margins increased from 11.4% to 12.6% in 2013, in spite of a 6% revenue decline during the year.
Display advertising revenue for 2013 stood at $1.95 billion, which is a 9% decline. However, Yahoo! is selling more ads; the number of ads sold in the holiday quarter increased 3%, but the price per ad declined 7%. Search revenue for the full year stood at $1.74 billion, which is an 8% decline. But, the company is selling more search ads as well. In the holiday quarter, the total number of paid clicks increased 17%, but price per click declined 3%.
Yahoo! has been doing very well adding mobile users to its various websites. The company added 150 million mobile users in just 14 months and now has more than 400 million mobile users. Yahoo!'s social presence has also been growing through the Tumblr platform. Tumblr saw time spent on its platform increase by 40% in the last quarter, but Yahoo! still lags other Internet leaders like Google and Facebook (META -10.56%). Facebook has more than 1.23 billion users, and also possesses significant amounts of personal data about those users, which makes it a very attractive destination for online advertisers. As a result, Yahoo! is facing heightened competition, especially regarding display advertising from both Google and Facebook.
But, the company is tweaking the user interfaces of its high traffic sites including Yahoo! Sports, Yahoo! Mail and Yahoo! Finance, and this should drive more users, particularly on mobile. With a rising number of visitors to its various platforms, Yahoo!'s monetization is likely to increase in the near future. The company is already seeing growth in ad volume trends, but the pricing on those ads has been on the decline due to more ad placements on mobile devices.
Asian assets are invaluable
Chinese e-commerce giant Alibaba saw its top line revenue grow 51% year-over-year to $1.78 billion in the most recent quarter, and its net income margin stands at a healthy 45%. Analysts expect that Alibaba can be a $150 billion company when it lists in the public equity markets, and Yahoo!'s 24% stake in Alibaba protects a large part of any downside risk.
The other significant asset on Yahoo!'s balance sheet is its 35% stake in Yahoo! Japan. The Yahoo! Japan holding is more easily valued because it's publicly traded and has a market cap of roughly $35 billion. The rising value of these assets and their earnings substantially helps Yahoo!'s net income and will continue to do so going forward.
Future growth
Yahoo! is making progress and investing heavily in secular growth areas of mobile, social, and video. The company is expanding its video offerings on various Yahoo! verticals, which will enable revenue growth this year. Yahoo!'s mobile revenue increased 200% in 2013, which is a very good sign. The company has been growing user traffic levels, especially on mobile, including both mobile apps and mobile web.
Yahoo! recently launched a simplified ad platform to enable advertisers to use a self-service advertising platform, which should aid revenue from image ads, stream ads, and sponsored posts on Tumblr. The company will be able to monetize Tumblr more effectively with these enhanced advertising technologies in place. Yahoo! also plans to buy back a lot of stock in 2014, which should be instrumental in growing EPS, and its investment holdings will provide additional upside as its core business improves. The pull-back on Yahoo! stock represents a good entry point for a long-term investment holding.
