Yahoo! Inc. Gradually Getting Its Act Together: Susquehanna

An October 22nd research report from Susquehanna Financial Group highlights tech titan Yahoo! Inc. (NASDAQ:YHOO), suggesting that the firm is continuing to show incremental improvement in operations. Susquehanna analyst Brain Nowak and colleagues reiterate their Neutral rating on the stock, but raise their price target from $41 to $43.

Highlights of Yahoo third quarter earnings

The Susquehanna report noted that Yahoo had a strong quarter, reporting third quarter 2014 revenue (ex. TAC) 3% above their estimates and 4% above consensus analyst estimates. The display segment was modestly improved, down -6% YoY and surpassing Susq estimates by 3.5%. The search growth number of 5.5% was 2% below Susquehanna’s expectations. Of note, the biggest driver of the revenue surprise was “Other”. The company also surpassed EBITDA and EPS expectations by 19% and 53%, respectively (largely because of higher equity income).

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Furthermore, fourth quarter guidance was also higher than expected, with net revenue projected at $1.14 billion-$1.18 billion (1.5% above Susq’s previous estimate at the midpoint). The top end of fourth quarter EBITDA guidance of $340 million to $380 million was in-line with Nowak et al’s previous expectations ($381 million).

More capital returns via stock buybacks

Yahoo! Inc. (NASDAQ:YHOO) also noted that it will continue its capital returns plan, and intends to return at least half (around $3 billion) of its Alibaba Group Holding Ltd (NYSE:BABA) IPO proceeds to shareholders. Of note, the company entered into a $1.1bn accelerated share repurchase which, together with other third quarter and projected fourth quarter buybacks, should lead to YHOO buying back at least 49mn shares in the second half of the year. Nowak and colleagues say that shareholders should expect more buyback capital returns in 2015, and model $2.8 billion of buybacks next year (approx. 73mn shares).

More acquisitions likely

Moreover, Yahoo also reaffirmed its M&A strategy during the third quarter earnings call, and intimated they will continue to look at all types of deals (including in the video ad platform sector to grow Yahoo! Ads Manager). Also of note, the current $12.7 billion in tax efficiency will give Yahoo significant room for deals, and management’s tone doesn’t seem to hint that the firm’s acquisition spree is going to end any time soon.