Yahoo! Q1 – Darker horse

Difficult results in display advertising mask the potential.

• Yahoo! reported disappointing results as display advertising continued to decline despite the remedial actions put in place by the new team.  
• Q1 Revenues / EPS were $1.07bn / $0.35 compared to consensus at $1.10bn / $0.25. Better expense control was the main reason for the EPS beat.
• The problem was display advertising which declined 11% YoY.
• Here Yahoo has made changes to its user experience resulting in fewer ads per page.
• While the fall in ads numbers has an immediate impact on revenues, the improvement in the user experience takes much longer to be seen explaining the current shortfall.
• The usage metrics have moved in the right direction but Yahoo! expects that it won’t be until H2 2013, that display advertising begins growing again.
• Consequently, guidance for Q2 was soft with revenues expected at $1.06bn-$1.09bn compared to forecasts at $1.11bn leaving full year also looking soft at $4.5bn-$4.6bn compared to consensus at $4.6bn.
• Clearly the market was hoping that results from the transition would be coming through more quickly and I expect that many will be looking to take profits after a good run.
• Yahoo! recognised once again that mobile is incredibly important for its future but still seems undecided in terms of how it wants to address it.
• It has partnerships with most of the big ecosystem players but providing stock quotes and weather data for iOS applications hardly constitutes a proper mobile strategy in my view.
• Yahoo! stated that it now has 300m mobile monthly users up from 200m just three months ago but did not explain what this number means.
• I suspect that this is the number of times that a Yahoo service or data feed has been hit from a mobile device each month.
• Given that Yahoo! has around 120m active users overall, I think this is an indication of an increase in usage of Yahoo! services on mobile devices and nothing more.
• Usage metrics are going in the right direction and the talent attrition has been stopped but there is no real sign of this in the numbers yet.
• If the future for Yahoo! is imobile, it needs to get an ecosystem up and running because at the moment Yahoo! is almost invisible to the user on a mobile device.
• I think that a user experience along the lines of Facebook home is probably the right place to go but Yahoo! does not have anything like the same user draw that Facebook does to kick start such a move.
• Hence, I think that Yahoo! needs to get its 120m users actively using and loving its applications on their mobile devices before attempting to spread its influence further.
• Yahoo! already has the assets to be a proper player in the internet ecosystem, but I am yet to be convinced that it has the depth of character and the insight to really make it work.
• Yahoo! is my dark horse among the internet ecosystem players and these results make it a darker one for at least the next quarter.