Earnings Preview: Yahoo! Inc. - Analyst Blog
14 April 2012 - 4:30AM
Zacks
Yahoo! Inc. (YHOO) is scheduled to announce its
first-quarter 2012 results on April 17, 2012. We witness upward
movements in analyst estimates in the build-up to the release.
Prior-Quarter Synopsis
Yahoo’s fourth-quarter non-GAAP earnings were up 18.7%
sequentially, better than what most investors were expecting. The
primary reasons for the earnings growth were lower-than-expected
operating expenses, a lower tax rate and lower share count.
Revenue was up 8.8% sequentially and down 13.2% year over year
at $1.32 billion. The year-over-year decline was due to
lower-than-expected display and search revenue. Gross margin was
down 28 basis points (bps) sequentially and 675 bps year over year
to 70.2%. However, operating margin expanded in the quarter on
lower operating expenses and solid cost management.
First Quarter Guidance
Yahoo expects revenue (ex-traffic acquisition costs, or TAC) of
$1.06 billion, or down 19.6% sequentially. TAC is expected to be
$95–$155 million and other costs are anticipated to be $825–$795
million. This is expected to generate operating income of $105–$155
million.
Detailed earnings results can be viewed in the blog
titled: Yahoo Has Moderate Q4
Agreement of Analysts
One out of the 25 analysts providing estimates for the first
quarter raised estimates, while none moved in the opposite
direction in the last 30 days. Over the same period, 2 analysts
made upward revisions for fiscal 2012.
The majority of analysts expect a decent first quarter, with
revenue and earnings coming in line with the Street estimates of
$1.06 billion and 17 cents, respectively. Though they do not expect
any upside to the display estimates in the first quarter, they
believe that the display business can return to double-digit growth
in the second quarter.
The analysts believe that the company’s restructuring
initiatives will better align cost with revenue, thereby improving
the margin profile of the company.
On the other hand, a handful of analysts believe that Yahoo!
continues to face substantial headwinds in its core display and
search businesses. They contend that Yahoo continues to lose share
in the overall display ad market and believe that the
organizational turmoil will cause the company to grow at a slower
pace in the near term than it might otherwise have done.
Additionally, the analysts believe that Yahoo! will continue to
lose share in the paid search market to its competitors,
Google Inc. (GOOG) and Microsoft
Corp. (MSFT). Hence, they expect Yahoo to report below
consensus first-quarter results.
Magnitude of Estimate Revisions
In the past 30 days, there was no change in the Zacks Consensus
Estimate for the first quarter but it increased a penny to 82 cents
for fiscal 2012.
Over the 90-day period, the Zacks Consensus Estimate fell 3
cents to 17 cents for the first quarter and 6 cents to 82 cents for
fiscal 2012.
While the new CEO’s efforts, including the recent restructuring
to transform the business are encouraging, we believe that the
impact will not be evident in the near term. We think that the key
problems is Yahoo’s declining search share and the resulting impact
on its overall financials, stiffening competition from Google,
Microsoft and Facebook, and organizational changes could be the
reasons for the downward movements in estimates over the 90-day
period.
Our Recommendation
Though Yahoo remains one of the biggest Internet names and has a
position in online search, the company has been struggling in
search against archrival Google for some time now.
The new CEO Scott Thompson is looking to restructure its
businesses by cutting down jobs and focusing on its online content
properties and media business, which drive most of its revenue.
Very recently, the company eliminated 14% of its workforce, which
we think could significantly reduce costs and improve Yahoo’s
margin profile.
In the upcoming first quarter, we are unlikely to see very
strong revenue numbers due to weakness in the display and search
businesses. However, gross margin figures could come above
expectations due to cost control measures taken by management.
Continued investment in the business (particularly product
development and sales), could be a drag on operating margins.
However, we believe that Yahoo’s restructuring efforts are not
enough to bring a total turnaround in the company. We believe that
Yahoo will be a wait-and-see story, although any color Thompson
provides about his strategy during the company's first-quarter
earnings announcement could clarify matters.
Yahoo shares carry a Zacks #3 Rank, implying a Hold rating in
the near term (1-3 months).
GOOGLE INC-CL A (GOOG): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
YAHOO! INC (YHOO): Free Stock Analysis Report
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