Yahoo Earnings Preview: The Drought in Revenue Growth May Break

Yahoo earnings preview
Yahoo earnings preview

After five consecutive quarters without a single period of year-over-year revenue growth, Yahoo (YHOO) is expected to get a little relief when it reports its first-quarter earnings on Tuesday afternoon.

And the relief, indeed, will be scant. Analysts estimate Yahoo will post just under a 3% increase in revenues to $1.62 billion, according Thomson Reuters. Compare that to Google's (GOOG) recently reported quarterly results, which boasted a 23% revenue increase to nearly $6.8 billion.

Online advertising, which Yahoo and other Internet media companies so heavily rely on, has been picking up, and Yahoo is expected to ride the tide, according to Wall Street analysts. "Potential upside exists from the display ad business (est'd. up 11% Y/Y) yet search may be challenged by ad spending weakness for Yahoo!," notes Jeetil Patel, a Deutsche Bank analyst, in a recent research note.

Key Issues

Yahoo's profits are expected to come in at 9 cents a share and show a slight improvement over the same time last year, according to Thomson Reuters. Previously, analysts were even more optimistic, but over the past three months they've pushed estimates down from 10 cents a share.

Besides revenues and profits, investors may want to key in on a few other issues that Yahoo faces, notes Mark Mahaney, a Citigroup Global Markets analyst, in a research note. Among them:

  • Integration and execution on Microsoft's (MSFT) closely watched search deal with Yahoo.

  • Strength of Yahoo's display-ad business.

  • Indications that it's nudging toward increasing its GAAP operating margin to 15%-20% over the next two years from 8% last year.

  • And what plans does Yahoo have for its $4.5 billion cash hoard? Acquisitions? A stock buyback?

"Given the MSFT Search deal, the importance of YHOO's Display Advertising segment is key for investors," Mahaney noted in his research report.

Under the Microsoft deal, Yahoo, which was a pioneer in Web search, agreed to outsource its search technology to the Redmond giant, which will use its Bing search engine as the delivery mechanism for serving paid search ads. Basically, these are the ads that show up on the right side under "sponsored results" when results from a keyword search are returned. Yahoo will focus its advertising efforts on display ads, which are akin to billboards that companies often use for branding. In addition, Yahoo will also make money off the deal by being the global ad-sales force for both Bing's search ads and its own display ads.

Mahaney notes that the companies also plan to keep working toward transitioning paid search results "prior to the 2010 holiday season, but may postpone this till 2011." So, if investors hear of a postponement to next year, don't freak out.

"Accelerating Business Momentum"

And while it'll be good to see how Yahoo stacked in the first quarter, investors will be particularly interested in getting a sense of where it's headed.

"Given the stronger-than-expected overall and online ad trends industry-wide in early 2010, we expect management's forward outlook to incorporate accelerating business momentum in 2Q, especially in display ads. We are currently looking for revenue to accelerate from +2% Y/Y in 1Q (4Q -4% Y/Y) to +5% Y/Y in 2Q, yet search upticks may be necessary to drive numbers," Patel notes in his report.