Yahoo! Q4 – Tough love.

Alibaba grabs attention but upside is in the ecosystem.

• The value in Yahoo! continues to be driven by the Asian affiliates while the core business drifts gently downwards.
• This is disturbing but also where the opportunity is to be found if Marissa can live up to her billing.
• Revenues / EPS were $1.2bn / $0.33 compared to consensus of $1.2bn and $0.38.
• Display advertising revenue continues to be the bugbear as it is still declining at 6% YoY masking the growth of 8% from search based revenue.
• The good news is that this decline has slowed from 13% over the last year and I am hopeful that some effects of improving the product suite are starting to show through in the numbers.
• However, until the decline can be halted, the numbers in the core business are going to continue to be disappointing.
• Yahoo! claims now to have 400m mobile users but this is a number that makes no sense at all.
• These are the kind of numbers that Google and Apple have achieved and Yahoo! remains way behind these two in developing a coherent mobile ecosystem.
• What I can believe is that during Q4 2014, 400m mobile devices interacted with one of Yahoo!’s properties.
• Beyond that I struggle. This is especially because there are no revenues that I can see coming from these supposed 400m users.
• Adding Yahoo! to Tumblr and taking out the overlap, I can believe that Yahoo! has something in the region of 250-300m users but these are predominately in the fixed Internet.
• Guidance was also not great with revenues of $1.06-$1.10bn compared to estimates of $1.08bn.
• Yahoo!’s bottom line continues to be driven by the affiliates and particularly Alibaba which saw income from operations continue to grow strongly.
• Alibaba is expected to IPO in 2014 where Yahoo!’s 24% holding could be worth anything up to $46bn if some estimates are to be believed.
• Until this figure is crystallised, the share price of Yahoo! will be driven by little more than Alibaba, giving Marissa time to turn around the stubbornly sluggish advertising revenues.
• When I look at Yahoo! it is still the dark horse of the mobile ecosystem race.
• It has all of the assets to make a good ecosystem already in place. It just has to execute on those assets and tie them all together in a great mobile experience.
• The market is giving Yahoo! no credit whatsoever for this and once Alibaba is out of the way there could be yet another leg up if Marissa can keep her promises.
• This is why I like Yahoo! as it has both downside protection from Alibaba as well as upside from forgotten potential.
• However, with declining display advertising and slow turnaround one has to be patient.
• Yahoo! requires tough love both from investors and management.