3 Reasons Why Yahoo's Turnaround Could Be Succeeding Apr. 7, 2015 10:19 AM ET | About: Yahoo! Inc. (YHOO), Includes: BABA, GOOG, GOOGL, TWTR by: Brian Wu Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Summary
•Yahoo’s display revenue has been on a downward spiral for years, leading some people to discount the company’s turnaround efforts.
•The segment, however, is likely to start growing again in the current year and maintain the momentum going forward.
•The outlook for all of Yahoo’s key segments is good.
I recently came across an article on Business Insider which painted a rather gloomy picture of Yahoo, Inc.'s (NASDAQ: YHOO) turnaround efforts by stating that the company's ''recovery is so weak'' that Twitter (NYSE:TWTR) was on course to leapfrog it and become the third-largest display ad company in the U.S. in 2015. While the author's line of argument was quite valid, I beg to disagree with her conclusion because she only presented part of the company's business segments and failed to look at the bigger picture.
When current Yahoo chief executive Marissa Mayer took over at the helm about 21 months ago, one of the key pledges she made to investors was to reverse the fortunes of the pioneering Internet company by returning it into positive top line growth in her first two or three years on the job, and eventually achieve double-digit growth five years down the line. While it might be too early to judge whether the CEO has delivered on her promises considering it's barely two years since she joined the company, it's certainly worth exploring whether she can achieve her targets. It's an open secret that Mrs. Mayer has lately found herself besieged by a clique of powerful disgruntled investors. Nicholas Carlson in his book ''Marissa Mayer and the fight to Save Yahoo'' points to the CEO's missteps and how a groups of activist investors have been pressing her hard to alter her strategy, in particular to liquidate Yahoo's $40-billion stake in Alibaba (NYSE: BABA) and pass the proceeds to shareholders while avoiding spending the money on large acquisitions (Yahoo has acquired more than 40 companies during Marissa's short tenure).
Everyday investors are, of course, not always privy to the inside operations of the companies they invest in, or the ongoing political machinations. After all, what really matter to them is that they get a good return on their investment at the end of the day. The only real test of Marissa's strategies is whether she succeeds in returning Yahoo to consistent growth.
Yahoo Revenue Trends
Yahoo reported its fourth quarter and full-year fiscal 2014 results in January. The company reported revenue of $4.618 billion, or year-on-year growth of -1.34%. The growth certainly does not look like anything to write home about, but was, nevertheless, a notable improvement compared to the previous year when the company posted -6% top line growth. The bright spot on the report was the company's GAAP EPS which grew from $1.26 during the previous year to $7.45 in fiscal 2014, a huge 491% jump.
If Yahoo is able to start recording positive revenue growth consistently by the second half of the current fiscal year, then Marissa will have delivered on her first pledge to return the company to growth in the space of 2-3 years. My bet is that it will.
Let's delve deeper into how Yahoo's key segments performed in 2014, and why I'm convinced that the company is on the right track:
Display is down, Mobile is up
Yahoo's display revenue accounts for 40% of its overall revenue. Revenue from the segment has been falling over the past few years. Yahoo's display revenue fell 9% to $1.950 billion, while in 2014 it fell 4% to $1.868 billion. It's important to note that the company's display revenue has not been falling due to a decrease in the volume of ads served up, but rather due to a huge decline in the average price-per-ad. For instance, Yahoo's ad volume increased 3% in 2013, but was accompanied by a 7% decrease in the average price-per-ad leading to a decline in revenue by the segment. In 2014, the company recorded a healthy 17% growth in volume of ads sold, but unfortunately, this was once again accompanied by a huge 20% decline in the average price-per-ad, leading to yet another revenue decline. It's quite likely that this segment's revenue is not falling due to poor execution by the company, but rather due to intense competitive pressure in the space leading to lower rates by marketers.
I would have wanted to compare Twitter's average-price-per ad to Yahoo's to see if my theory holds up, but unfortunately, Twitter only reports ad revenue per 1,000 timelines and not the average price-per-ad, so this would be an apples-to-oranges comparison.
The good news, however, is that Yahoo might finally be able to reverse this trend and start recording positive growth in the current year. eMarketer estimates that Yahoo will record 1% growth in its display revenue during the current year and 2% growth in the two subsequent years.
Source: eMarketer
The even greater piece of news for Yahoo is that its mobile revenue growth is projected to accelerate. Yahoo's share of U.S. mobile advertising (search, display and messaging-based ads) is estimated to be 3.74% in the current year and 4.2% in 2016. This means that Yahoo will leapfrog Twitter as the third-largest mobile ad player in the country since Twitter is expected to have a 3.69% share in the current year and 3.8% in 2016.
Yahoo's huge investments in the mobile space has started paying off. The company acquired Flurry mobile app network in 2014 and has an in-house initiative, Gemini, which is a native advertising platform. This is highly significant for the company because mobile advertising is projected to surpass desktop advertising during the current year and to continue outpacing it going forward.
Source: eMarketer
Yahoo started reporting its mobile revenues in the third quarter of 2014 when it recorded revenue of $200 million. The figure then grew to $254 million during the fourth quarter, a healthy 27% Q-o-Q growth. The company finished the year with mobile revenues of $768 million. This is impressive growth. eMarketer estimates that the U.S. mobile ad market will grow from $18 billion in 2014 to $60 billion in 2018. The company is placing a special emphasis on the segment - when Marissa joined Yahoo, the company's mobile division had only 60 workers, or less than 1% of its workforce, but now it has 600 workers.
If Yahoo can maintain its 4.2% mobile ad market share projected for 2016 all the way to 2018, then the company's mobile ad revenue will reach $2.52 billion by 2018, a robust 49% CAGR, and more than enough to offset the company's weakness in display revenue.
Growth in Search
Yahoo's search segment is one of its key pillars, accounting for 38% of its revenue. The company managed to turnaround this segment and recorded positive growth last year. In 2013, the company's search revenue fell 8% to $1.742 billion. In 2014, revenue for the segment grew 3% to $1.793 billion.
I expect Yahoo's search segment to continue recording faster growth. Yahoo inked a 5-year agreement with Firefox last year to become its default search engine in the U.S. instead of Google (NASDAQ:GOOG) (NASDAQ:GOOGL). The deal paid off almost immediately, and Yahoo was able to reverse its 6-year market share loss. Yahoo's search engine market share improved from 10% before the Firefox deal to 13% three months after the deal. Meanwhile, Google's share fell by a similar margin.
Source: Marketing Land
Amazingly, Yahoo's share has continued increasing several months after the deal despite Google's efforts to lure back its customers. This can be chalked up to the company's sustained efforts to promote the ''New Firefox.''
(click to enlarge)
Source: Marketing Land
Yahoo's search engine market share clocked in at around 20% seven years ago. There is a good chance that it will hit 15%-18% over the next two years, which should provide a nice boost to the company's search revenue. If the company's search engine market share is able to hit the 15% mark in the next one year, this could translate to a 10%-12% growth in the company's search revenue.
Transformative Investments
Yahoo reports its mobile, video, social and native revenue under its ''Transformative Investments'' segment. This is the segment where the company reports most of the revenue from its acquisitions as well as its home-grown initiatives. Yahoo's Transformative Investments grew a blistering 80% to $1.1 billion in 2014, meaning the video, social and native revenues (excluding mobile) were $332 million. This is a new revenue segment for the company. This growth is being powered by some of Yahoo's smart acquisitions such as Tumblr.
(click to enlarge)
Source: Piper Jaffray, 2014 Teen Survey
Tumblr's userbase has increased 40% since Marissa took over as Yahoo CEO to 420 million monthly active users, exceeding Twitter's 284 million users. Tumblr is projected to bring in revenue of $100 million for the company in the current year. Yahoo has been wooing top YouTube users to make Tumblr its distribution channel of choice. With such a large userbase, the company might succeed in getting top-quality content and increase traffic even more.
Conclusion
The outlook for virtually all of Yahoo's revenue segment is good. Display advertising is the only segment that has been consistently losing money but is expected to start growing in the current year. Yahoo's mobile segment and transformative investments especially look promising and will give a good boost to the company's top line growth. This is a company to watch. It might be popular right now to bash Yahoo, but let's focus on the facts instead of mere sentiments.
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