Yahoo! Q2 – The long haul.

Yahoo! has a lot going for it but it will be some time before it shows in the numbers.

• Yahoo! reported Q2 results that were hindered by weakness in display advertising but rescued by great performance from its Asian associates.
• Q2 Revenue and adjusted EPS were $1.07bn / $0.35 compared to expectations of $1.08bn and $0.30 respectively.
• Yahoo Japan and Alibaba contributed $225m to the bottom line up from $180m last year which was somewhat stronger than expected.
• This helped turnaround the shares which initially fell 3.2% but recovered nicely towards the end of the after-hours session.
• Guidance was also a little soft with Q3 revenues expected to be $1.06bn-$1.11bn compared to forecasts of $1.12bn.
• This is a reflection of display advertising where market share is still being ceded and pricing power is weak.
• The process of turning around Yahoo! is still in its middle stage but there are some encouraging signs that herald a revenue pick-up further down the line.
• Advertising is all about traffic which in turn comes from having good products that users want to use.
• Q2 saw YoY traffic growth return to parts of Yahoo! for the first time in a very long time
• This combined with the substantial improvements that have been made across the portfolio over the last year give me confidence that revenue growth will return.
• There are four cornerstones to Yahoo!’s return to growth: search, mobile, display and video.
• Yahoo! has three of these in hand with a decent strategy to address each one.
• Video is the real problem as the inventory sells out way in advance implying that much more content is needed to boost revenue.
• This, combined with the fact that Yahoo! Screen is a poor service is why Yahoo! is actively seeking a video related acquisition.
• Now that Hulu is off the table, Yahoo! badly needs to address this shortcoming in order to properly address the revenue opportunity that video presents in the fixed line.
• Video is less of an issue in mobile as users spend only 8% of their time on smartphones consuming media.
• Yahoo! is managing to tread water while it overhauls its strategy to return to growth.
• In the meantime, the excellent performance of its affiliates is what has really driven the recent rally in the share price.
• This implies that a recovery in the core business and a move in to mobile all represent upside.
• Yahoo! remains the most interesting stock to look at in the world of mobile ecosystems although some patience is required.