Yahoo! Q1 – Lucky tailwind

Opportunity remains but time shortens.

• Yahoo! reported reasonable results from its core operations while it was Alibaba that drove Net Income to be above expectations.
• Revenue / Net Income were $1.09bn / $402m beating consensus of $1.08bn / $372m by 1% and 8% respectively.
• This was almost entirely driven by Alibaba which grew revenues by 66% and Net Income by 110% soundly beating most people’s expectations.
• However, there are signs of improvement as display revenue saw its first YoY growth since 2011 with growth reaching 2%.
• This is a major milestone confirming the trend of the last 5 quarters and following the growth of traffic across Yahoo! properties.
• I suspect that display growth will not accelerate much beyond 3% or 4% as display is not as good as search and more importantly Yahoo! position in mobile remains weak.
• However, as long as display can remain in positive territory, this gives the company a platform from which to grow revenue in other areas.
• Here the company was again at pains to point out that it is all about mobile as that is where all the growth in advertising spend is currently to be found.
• This remains Yahoo!’s weak spot as it has the assets but has yet to do a decent job of putting them together to form a decent ecosystem.
• It is by putting the assets together and really understanding who one’s users are that real value can be created.
• Yahoo! is very far from this goal but importantly the market gives it no credit whatsoever when it comes to delivering on this proposition.
• The focus remains on the performance and mooted valuation of Alibaba when it goes for its IPO this year.
• Once the value of Alibaba has been crystalised, attention will return to the core business where Yahoo! has real opportunity but has yet to deliver.
• Of delivery there was little sign as guidance was in line with expectations with Q2 revenues expected at $1.08bn compared to consensus at $1.09bn.
• Marissa still has time to deliver and there are glimmerings of a turnaround but much still needs to be done and the grace period is getting shorter by the day.
• Yahoo! is still my top ecosystem pick as Alibaba gives some downside protection while there is substantial upside from a turnaround and development of a mobile ecosystem.
• If the grace period ends with no delivery then the shortcomings in execution will be obvious for all to see.