Yahoo! Q3 15A – Scratching for scraps

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The ecosystem is Yahoo!’s only chance at a turnaround.

• Another lacklustre set of results further underscores that Yahoo!’s inability to execute on its assets is the main reason for its underperformance.
• Furthermore, it appears that Yahoo! has simply been buying revenue growth as all the improvements seen in the top line this quarter were more than eaten up by growth in traffic acquisition costs (TAC).
• Q3 15A revenues-ex TAC / EPS were $1.0bn / $0.15 missing consensus of $1.03bn / $0.16 and falling by 8%YoY and 70% YoY respectively.
• The worst culprit was search revenue which grew by 13% YoY but after TAC was deducted, it saw a 13% YoY decline clearly indicating that Yahoo! has simply been buying revenue growth rather than adding any value of its own.
• It is here where I find the critical flaw in Yahoo!.
• Outside of a few desktop services like mail, sports and finance, it adds very little value to users which is why it has to pay away its revenue growth to those that do.
• To rub salt into the wound Yahoo! was proud to announce that during Q3 15 mobile generated $270m in GAAP revenues growing 31% YoY.
• I continue to conclude that Yahoo!’s inability to execute on its assets is costing shareholders 89% of the mobile opportunity.
• Yahoo! has good coverage of Digital Life which combined with its 500m monthly users means that it should have generated far more revenue than this.
• Benchmarking Yahoo! against Google, Twitter and Facebook leads me to conclude that Yahoo! should have generated something like $2.5bn in revenues from mobile rather than $270m.
• This is further underlined by the fact that its competitors are all seeing revenue growth while Yahoo! struggles to keep its revenues flat.
• This continued inaction led to more disappointment in guidance with Q4 15E revenues expected at $920m-$960m, missing consensus of $1,079m by 13%.
• What Yahoo! needs to do is put its assets together in an integrated, easy and fun to use way and push them onto mobile devices.
• This would create a consistent environment where users could live their Digital Lives with Yahoo! and critically, enjoy doing so.
• This would also allow Yahoo! to have a much deeper understanding of its users and thereby be able to monetise them much more effectively.
• I continue to believe that Yahoo!’s inability to do this is what is causing it to miss out on 89% of the opportunity in mobile.
• Without this, Yahoo! is left scratching for the scraps, being forced to form partnerships with its stronger rivals and pay away large proportions if not all of the revenues that it earns to others.
• I fear that the outlook will continue to deteriorate from here.
• There are far better places to look for exposure to the digital ecosystem.