RBC Capital Markets analysts Mark S. Mahaney and Andre Sequin rate Yahoo! Inc. (NASDAQ:YHOO) as Outperform as they provide a preview for what Yahoo has to offer in its fourth quarter earnings.


Based on intra-quarter data points, channel checks, and our model sensitivity work, we view Street estimates as reasonable for the quarter. Yahoo! Inc. (NASDAQ:YHOO) is expected to report Q4 results on January 28: In Q4:13, we are expecting net revenue (ex-TAC) of $1.21B, in line with consensus at $1.20B. We are also estimating EBITDA of $411MM and non-GAAP EPS of $0.40 vs. the Street at $411MM/$0.38. Note that our and Street revenue and EBITDA estimates are in the middle of the company’s Q4 guidance range.

Intra-quarter data points

1) US desktop search query share decreasing – Yahoo! Inc. (NASDAQ:YHOO)’s share of US desktop search queries decreased in Q4, down 30bps Q/Q to 11.0%. Given Google Inc (NASDAQ:GOOG)’s even stronger presence in Mobile, it is highly likely that Yahoo!’s share of overall US search queries is single digits.

2) Slightly improving comScore engagement trends – Worldwide, both Yahoo! page views/visitor and minutes/visitor increased Y/Y in Q4 – the first time we have seen this since we have been tracking the data. This could be one of the first concrete signs of improving user engagement at Yahoo!.

3) Strong Chinese Singles’ Day sales – Alibaba (which Yahoo! has a 24% stake in) disclosed that the company did $5.7B in transactions on Chinese Singles’ Day – up 83% Y/Y and more than 2x the total volume of US online sales on Cyber Monday.

4) Series of new acquisitions – Yahoo! Inc. (NASDAQ:YHOO)’s string of acqui-hires continued in the quarter, though at a slower pace. Acqui-hires have been a staple at Yahoo! under Marissa Mayer.

Key items to focus on

1) Alibaba performance – Yahoo! Inc. (NASDAQ:YHOO)’s 24% stake in Alibaba may be responsible for 50% or more of the stock’s value. Yahoo! reports limited financial performance for Alibaba one quarter in arrears, so we will get Q3:13 results this quarter.

2) Search metrics – In Q3, paid click growth stayed constant while PPCs declined in part because of a geographic mix shift and shift to mobile. We would expect a continuation of these trends.

3) Display metrics – In Q3, ads sold were up while ad pricing declined. These two metrics were probably the most fundamentally troubling of all of YHOO’s disclosures.

4) Status of Tumblr integration/monetization – The Tumblr acquisition could do a lot to bring Yahoo! products to a younger demographic, if the company can avoid alienating users while ramping up monetization of that service.

Yahoo’s valuation

We are still believers in a potential turnaround story at core Yahoo! Recent history suggests that Internet turnarounds are multi-year processes built on improved products and execution. We believe current valuation still implies only modest expectations for the core Yahoo! business (arguably just 5x 2015E EV/ EBITDA).