Yahoo! Q3 14A – Game of numbers

Yahoo! must focus on registered users to have any chance of growth.

• Yahoo! reported reasonable Q3 14A results but still the commentary and promises are failing to show through in the numbers.
• Q3 14A Revenues-ex TAC / EPS were $1.09bn / $0.52 compared to estimates of $1.05bn / $0.30.
• Display based advertising continues to be the biggest problem which fell heavily by 6% YoY during the quarter.
• According to Yahoo!, it is PC based advertising that is causing all of the problems which is dragging revenues down by $60m a quarter.
• This is offsetting growth in search (up 6% YoY in Q3 14A) and mobile which grew 100% YoY to $200m in revenues during the quarter.
• It is here that I can’t get the numbers to add up.
• Yahoo! claims that it will generate $1.2bn in mobile revenues for the full year 2014E but it has only generated $200m during Q3 14A.
• If mobile is growing as fast as it claims, then Q1 14A and Q2 14A mobile revenues would have been much lower than $200m, meaning that Yahoo! will need to generate something like $800m in mobile in Q4 14E alone in order to make the target.
• This represents QoQ growth of 4x and would massively offset further declines in PC based display advertising.
• I can only assume that Yahoo! actually means that the run rate of mobile revenues will be $1.2bn by the end of the year implying Q4 mobile revenues of $300m.
• Even this looks to be a stretch but it is much more credible than what the company has actually stated.
• Even if this is correct, this represents $100m in incremental revenues compared to Q3 14A, which alone would more than offset the $60m drag from PC advertising and allow the company to see growth.
• However, this is absent from the Q4 14E guidance with $1.14bn-$1.18bn in revenues representing a YoY decline of 4.2%.
• The midpoint of this guidance is $1.15bn, below consensus at $1.17bn.
• Furthermore, Yahoo!’s user figures continue to be misleading in my opinion.
• Including Tumblr, Yahoo! now reports active monthly users at 550m up 17% YoY.
• However, this figure includes a substantial number of users just turning up to one of its properties to browse the content.
• I suspect that less than half of these users are registered users about whom Yahoo! can build a profile and start offering targeted advertising.
• The rest will only receive the generic display based advertising that Yahoo! is trying so hard to get away from.
• Consequently, I suspect that registered users are less than 300m of which the vast majority only really use Tumblr.
• Here lies the challenge for Yahoo!
• It must take its excellent collection of assets and integrate them such that users want to register and become part of the ecosystem rather than just turn up for a quick look.
• To do this it must move past just content and offer users services within which they want to live their Digital Lives.
• That is how the user profiles will be built and how Yahoo! can get access to the revenue streams where advertisers are really spending.
• This is how Google manages to outperform Yahoo! on growth despite being nearly 15x its size.
• Until this becomes a reality, the numbers are going to underperform the big promises, harming the potential for a stock that has a lot of fundamental upside.
• Google, Microsoft and Apple look like better prospects and I would continue to take Alibaba related profits on Yahoo!