Yahoo Earnings Steady; Display Revenues Decline, Alibaba Slows

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Yahoo Earnings Steady; Display Revenues Decline, Alibaba Slows
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Raymond James analyst Aaron Kessler maintains an Outperform rating for Yahoo! Inc. (NASDAQ:YHOO) as the tech giant reports In-Line 4Q results.

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Yahoo! Inc. (NASDAQ:YHOO) reported a generally in-line 4Q, though 1Q guidance came in below our/consensus prior estimates as Yahoo continues to reinvest while revenue growth remains flattish. We maintain our Outperform rating and increase our price target to $42 based on our updated sum-of-parts analysis, in which we assign $7 per share to Yahoo’s core business, $24/share to Alibaba, $7 per share to Yahoo Japan, and $4 per share in net cash.

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Yahoo’s 4Q13 earnings highlights

Net revenue (excluding traffic acquisition costs, or TAC) of $1.2 billion decreased 1.7% y/y (vs. -0.8% y/y in 3Q) and was in-line with our/consensus estimates of $1.2 billion and guidance of $1.18-1.22 billion. Display net revenue of $491 million declined 5.7% y/y (vs. -6.7% y/y in 3Q) and was 1% below our estimate, while Search net revenue of $461 million increased 8% y/y (vs. +2.9% y/y in 3Q) and was 4% above our estimate. Adjusted EBITDA was $478 million, though excluding a gain from “sale of patent,” EBITDA would have been ~$408 million vs. $510 million last year and in-line with consensus of $411 million and guidance of $400-420 million.

Positives for Yahoo

1) Search net revenue increased 8% y/y (vs. +2.9% y/y in 3Q) and was 4% above our estimate, driven by new search partners and ad format changes.

Negatives for Yahoo

1) Display – while improving slightly from last quarter, display revenues declined 5.7% y/y as Yahoo’s price per ad declined 7% y/y due to a lower percentage of premium inventory sold. 2) EBITDA guidance of $290-330 million is approximately 6%/16% below our/consensus prior estimates (at the midpoint). 3) Alibaba growth decelerated – Alibaba Group‘s revenues increased 51% y/y (vs. 61% last quarter) though net income growth remained strong at 161% y/y.

Guidance

Yahoo! Inc. (NASDAQ:YHOO) guided to 1Q14 net revenue of $1.06-1.10 billion, generally in-line with our/Street previous estimates of $1.082 billion/$1.079 billion and guided adjusted EBITDA of $290-330 million, below our/consensus previous estimates of $331 million/$367 million.

Estimates and valuation

For 2014, we lower our new revenue/EBITDA estimates by 0.4%/3.4% while our 2015 revenue/EBITDA estimates decrease by 1.2%/3.2%. Our $42 price target is based on a sum-of-the-parts analysis (see page three), which takes into account Yahoo! Inc. (NASDAQ:YHOO)’s core business, its Asian assets, and cash and investments.

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