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.
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.
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).
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